Securitisation of Debt

The Securitisation Law allows for a debt entailing some risk of collection to be transferred to a securitisation vehicle.

The Securitisation Law allows for a debt entailing some risk of collection to be transferred to a securitisation vehicle. Let's take a commercial company that holds a debt with a third party that has fallen due.

This debt is unlikely to be realised at face value (nominal, or initial) because the maturity has expired, and because of the risks in relation to the borrower or the statistical spread of risk related to the debt. It will therefore only be repaid in part, or not at all.

A decrease in value or a reserve must be recorded by the commercial company so as to comply with the principle of Fair Value.

This decrease in value or reserve will clearly affect the results or the equity of the commercial company. It is now possible to set up a securitisation vehicle in Luxembourg to which the commercial company will be able to transfer ownership of the debt, together with the non-collection risks attached to it.

The securitisation vehicle will then pay the commercial company the value of the debt, factoring in a certain discount or price reduction based on the recovery risk inherent to the debt.

Consequently the company will be relieved of this asset (debt) and will be able to receive a sum which of course will be lower than its nominal value, but will at least be able to release cash that had been tied up.

The company transferring the debt will thus be able to reduce its balance sheet and recover the asset at its current value. Consequently, the decrease in value or reserve for decrease in value of the debt may be cancelled since the risk itself will have been removed from the balance sheet. This will result in an improvement in the company's cash ratios and earnings for the financial year.