The credit enhancement inherent to securitizations, especially due to the aforementioned legal isolation techniques, permits the originating companies to obtain higher ratings than if such companies were to obtain a traditional loan. Consequently, the originating companies can obtain financing at a lower cost of funding.
Main Parties and Legal Documents
While securitizations come in a variety of structures, the following highlights the main parties and documents in a typical securitization.
The originator generates (originates) and/or owns the receivables (the cash-flowing assets) that it seeks to securitize. A securitization may have many originators. The sponsor is the person who initiates and drives the securitization. In some transactions, the originator is also the sponsor of the transaction.
The servicer is the person who performs the administrative services related to the collection of the receivables. The servicer may also have active management responsibilities with respect to the receivables/underlying assets, if the securitization’s portfolio is “dynamic.”
The Trustee/Collateral Agent
The Trustee/Collateral Agent is the person/organization (typically a bank) that holds the security interest on behalf of the investors and may perform certain other duties under the transaction documents. The person serving as Trustee may have multiple additional roles in a transaction, such as serving as custodian, account bank, or collateral administrator.
The Issuer is an entity created solely for purposes of a securitization and is responsible, among other duties, for issuing the securities. Some transactions have more than one issuer.
The underwriter is the person responsible for arranging for the sale of the Issuer’s securities to the initial investors.
The investors are the persons who invest in the securitization transaction by purchasing the securities originally issued by the Issuer and placed by the underwriter.
(See Figure 2 for a relationship diagram with typical transaction parties.)