und raising for future endeavors is one constant concern of a corporation. The problem is only the likes of the Ayala Corporation, San Miguel, PLDT, SM, and other huge Philippine companies have, for the longest time, the privilege of tapping the capital markets for additional funding.
But this paradigm is about to change after Republic Act No. 9267, otherwise known as the Securitization Act of 2004, was passed by Congress on 26 March of this year. This law provides the legal framework for securitization in the Philippines.
Securitization
The theory behind securitization is to allow a relatively smaller and less well-known entity to sell its securities to the general public. The usual barrier to the sale of securities to the public is the size and the financial strength of the issuer. Thus, our capital markets today have only big Philippine companies as regular issuers of securities. Although in the past, there has been a move to make available the public market for funds to smaller companies and entities, the takers have been few and far between. One of the main reasons is the non-acceptability of the smaller issuer. They do not have the balance sheet or the cash flow of the larger companies. This problem is sought to be addressed by the process of securitization.
The process of securitization allows an improvement of the ability of an originator or seller to tap the capital markets for funding. By improvement, we mean that there could be an improvement in the credit rating or there could be a drastic change in the ability of the seller or originator to float securities in the market.
Stellar Performer
The process works this way. Securitization allows a company to select a specific project or a pool of assets to become the underlying assets of a securitization exercise. Normally, the creditworthiness of a company is judged by the entirety of its balance sheet. Thus, all of its projects are lumped together and analyzed in order to come up with a credit evaluation of the company. In a lot of instances, the lumping up of all of a company’s assets and liabilities results in a lower credit standing for the company. Thus, a few bad projects or receivables or the existence of large liabilities of the company could very well drag down the company credit rating into the mud. The existence of a stellar performer among the company’s projects is not reckoned with at all.
Securitization allows the company to set aside that stellar performer and liquefy the receivables arising from such spectacularly performing project by selling it to a special purpose entity (SPE) which then issues asset backed securities (ABS) against the project receivables. The ABS are defined as securities issued by an SPE which depend for their payment on the cash flow of the underlying assets. The ABS that is issued is evaluated in the light solely of the merits of that specific project and not on the basis of the entire company. Thus, there would be an entirely different picture drawn from an analysis of the spectacularly performing project.
The Law
Indeed, the Securitization Law allows financial assets to be sold on a without recourse basis by an originator or seller to the SPE. The assets contemplated in the law are loans, receivables, or other similar financial assets with an expected cash payment stream. There are several entities involved in securitization. These are the originator or seller, the SPE, the servicer, the rating agency, the underwriter, and the SEC.
The originator or seller creates the financial assets or receivables. These are the banks, the financing companies, the leasing companies, the telephone companies, the public utility companies, and all other entities which in the course of their doing business, either provide a service or sell a product resulting in the creation of a receivable. The sale has to be on a “true sale” basis to the SPE to transfer title over the financial asset to the SPE.
The SPE then issues ABS for investment by the public. In order to sell such ABS to the public, the SPE has to register the same in accordance with the law. The SEC is the entity which approves registration. In order that the registration may be approved, there is a requirement that the SPE must submit a securitization plan to the SEC. The plan shall include, among others, a description of the nature and the mechanics of the sale of the assets from the seller to the SPE, any credit enhancement or liquidity support, the identities of the originator, seller, servicer and underwriter and describing their compensation, the identity, qualifications and compensation of the trustee, the aggregate principal amount of the ABS to be issued, and the rating agency which will rate the issue. After complying with the registration requirements and the approval of the plan by the SEC, the SPE may proceed to sell the ABS to investors.
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