Practical Law Glossary Item 5-383-8310 (Approx. 5 pages)
Glossary
Securitization
A complex financial transaction in which loans, receivables, or other assets that generate cash flow are pooled and sold to an issuer, usually a special purpose vehicle (SPV), which pays the purchase price for the assets and issues asset-backed securities (ABS), which are sold to investors.
The SPV uses the purchase price paid by the investors for the ABS to fund the purchase of the securitized assets. The securitized assets and the cash flows they generate are pledged to the holders of the ABS as collateral for their investment in the securities. All of these transactions take place virtually simultaneously at the closing of the transaction. Over the life of the ABS, the cash flows generated by the securitized asset pool are used to pay interest and principal on the ABS issued in the transaction.
The purpose of securitization is to convert illiquid assets into a security that can be sold to investors. Any asset can be securitized if it generates regular cash flow payments designed to guarantee the servicing and timely distribution of proceeds to the security holders.