Securitisation of a Risk

The Securitisation Law allows the transfer of a risk connected to an activity undertaken by a commercial company to a securitisation vehicle.

A commercial company expects to suffer potential losses related to a probable commercial risk, connected to external events of a political, commercial, climatic, or any other nature, such as the fulfilment of a clause in a contract, the imminent or future deadline for a particular event, etc.

In order to guarantee the survival of the commercial company, the latter approaches a securitisation vehicle and together they draw up an agreement whereby the securitisation vehicle undertakes to bear - either solely, jointly or partly - the risks associated with the occurrence or non-occurrence of the aforementioned events. In this case, the commercial company is released from the potentially negative consequences of the recognition of this risk in its business activity. It will transfer this risk and the corresponding potential charge to a securitisation vehicle which undertakes to reimburse it fully or in part for the negative effects related to the accomplishment of this event. The commercial company pays a premium to the securitisation vehicle in the case of partial or non-occurrence of this event.

The risk will then be assigned to the securitisation vehicle, with a financing obtained from external investors ready to 'purchase' this risk – 'discount' its occurrence. External investors receive securities representing their investment.

In case risks do occur in full or in part, investors will receive what they are entitled to, proportionally to their share in the transaction.

If however the risk does not occur, the entity retains the premium paid by the company; this will constitute the profit, which will be divided among the investors of the securitisation vehicle.

By transferring a risk to the securitisation vehicle, this operation also allows provisions made for contingent risks to be cancelled. This generates a positive result in the company's income statement for the current financial year as well as in the future, by precluding the need for additional provision for probable risks and charges.

This ability to assume the most extensive risks in connection with the activity of a third party allows the use of securitisation funds in numerous cases:

  • the incidence of a political risk for exporters,
  • the occurrence of climate risks (sun, rain, drought, hail, snow, cold, heat, etc. ) as part of a commercial or agricultural operation,
  • the problems connected with the successful completion of any type of contract,
  • the incidence of a choice made by a third party,
  • the incidence of a change in legislation,
  • the incidence of the expiry of a contract,
  • the incidence of a clause in an agreement,
  • the incidence of a death,
  • the incidence of disappearance,
  • the incidence of bankruptcy,
  • the risks related to recovery,
  • the risks related to the establishment of a legal or contractual obligation,
  • the risks related to the collection of a debt,
  • the risks related to the successful conclusion of a commercial transaction,
  • the risks related to the stability of sales,
  • the risks of charges in connection with financing,
  • the risks related to an investment undertaking,
  • the risks related to overruns in commercial expenses,
  • the risks related to energy costs,
  • the risks related to commodity prices,
  • the risks related to price stability,
  • etc.