Let’s take a commercial company that
expects to suffer potential losses related to a probable commercial
risk. For example, risks 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 assume - 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 firm 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
while financing is 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 of 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 risk (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, of a change in legislation, the expiry of
a contract, a clause in an agreement, a death, disappearance,
bankruptcy, all the risks related to recovery, to the establishment
of a legal or contractual obligation, the collection of
a debt, the successful conclusion of a commercial transaction,
the stability of sales, of charges in connection with financing,
an investment undertaking, overruns in commercial expenses,
energy costs, commodity prices, price stability, etc.
The following outline summarises the transaction:
Step 1: the firm pays a premium to the
securitisation vehicle to cover a risk in accordance with
an agreement signed between the parties.
Step 2: the risk is realised in part and
the securitisation vehicle partially reimburses the premium
to the company.
Step 3 : it retains the balance of the
premium under the terms of the agreement and pays the investors
their share of the profits.
