Advantages and Inconvenients of securitization:

The advantages :

• A new source of financing :
Securitization enables to change the illiquid portfolio into liquid stocks, which enables to « sell » the portfolio, not to an investor anymore, but to many investors, meaning to funds markets, a market with an important number of investors, present throughout the world.

• Transfer of risks:
The risk of loss on the portfolio went on the investors, which means that if the portfolio appears to be of bad quality and if the flows generated are insufficient, it is the investor that will undergo, if necessary, a financial loss.

However, it is rare for the whole risk to be transmitted to the investors. In general, some mechanisms are set so that the assignor keeps what we call the «first risk» on the portfolio.

For banks submitted to a control of risks by their controller, securitization, used as a risk transfer tool, is therefore particularly important.

• Balance-sheet management:
Securitization enables to manage the balance-sheet by controlling its inflation if it is considered as being excessive. Indeed, by refunding the credit portfolio, an assignor liberates funds and can increase his activity or generate new assets while keeping his balance-sheet at a controlled level, for the assets went out of his balance-sheet.

• Discretion:
A bank which gives up a credit portfolio prefers the transaction to stay discrete. What it wants the most is for its customer (the borrower) not to know anything about it. Securitization operations made respect the regulation on the protection of private life.

In order to satisfy this need for discretion:
1. in general, customers (borrowers) are not aware of the transfer of their credit.
2. the bank will still be the customers’ interlocutor, with this distinction that for now on, it will receive the funds on behalf of the SPC as the manager (no longer as an owner) of assets ; in securitization language we can say that the bank has become the assets servicer.

• Value extraction:
A securitization operation does not necessarily respond to other needs apart from the desire to extract the value of assets. Knowing that any asset producing financial flows can be securitized, securitization can be used as an arbitration tool, in the strictest sense of the word.

In order for the securitization to succeed, both intervener have to get something out of it :
• The assignor must be convinced that he has found the best cure for his financial needs.
• The investor must be convinced that it is a good investment.

The advantages for the assignor

• Liquefaction of non liquid assets: immediate change of non liquid assets into liquidities.
• Transfer of the risks: the risk to lose on the portfolio has gone to the investors.
• Access to a new source of financing.
• Reorganization of the balance-sheet: the assignor diversifies his financing sources without increasing his goods in process or weakening his shareholders. His needs in equity decrease.

The disadvantages for the assignor

• The cost of the operation and the complexity of the procedure : considering the number of interveners and the costs of the financial engineering are generally higher than those of a more classic financing operation.
• The important expenses during a first operation tend to noticeably decrease for the next operations.

Advantages and disadvantages for investors

• Investors no longer have interest to invest in stocks issued by the vehicle and linked to the securitized asset only in classic bonds that reinforced by no safety.
• The securitized asset comes out of the balance-sheet of the assignor and enters the investors’ balance-sheet. These received stocks are usually liquidities.
• Investors can transfer their stocks at any time and eventually make capital gains.
• The transfer of the risk goes to the investors.