iSwiss launches ‘share securitisation’, securitisation within everyone’s reach

Securitisation is an excellent alternative to borrowing and is widely used by companies and financial institutions worldwide as an alternative to bank loans or bonds. In Italy, securitisation is used exclusively by banks as a means of financing and disposing of receivables, in order to increase their working capital.

But what is securitisation in simple terms? Securitisation is a financial activity whereby a right to future cash flow is transformed into securities (hence the term ‘securitisation’) to be placed on the market to investors. In this way, investors advance liquidity to the borrower in exchange for the opportunity to participate in part of the future paper flows. The simplest example is credit. The holder of the legal right to collect a receivable in the future assigns it to an investor who will collect it instead. But even a real estate project that requires immediate liquidity against the prospect of lavish future receipts can lend itself to being securitised.

The difference, which is not insignificant, with the bank advance or bond is the risk transfer from the borrower to the market. In other words, in securitisation, the risk inherent in a future event (by definition always unpredictable) is transferred to the market so that if the future cash flow does not materialise or materialises to a lesser extent than expected, the investor will bear this loss in place of the borrower. The difference between bank discount and bond debt is that the latter must always be repaid.

Nevertheless, securitised securities, so-called ABSs, are considered safer on the market than bonds. Why this is so, is quickly explained. By purchasing bonds, the investor lends money ‘blank’ to a party, trusting in its ability to repay the loan and interest. In the securitised securities market, on the other hand, the investor buys a well-identified cash flow, whose contracts and securities are legal for collection. In other words, he does not lend money ‘blank’ but against the guarantee of a cash flow with which he can be repaid and paid interest.

This fundamental difference means that ABSs (the securities of the securitised companies) fall within the group of securities that can be purchased by pension funds (which are notoriously limited in their purchase options) or fall within the group of securities that can be used as an alternative to liquidity for insurance companies’ own funds (which can thus demobilise liquidity by replacing it with the securities of the securitised companies).

The main advantage of securitisation transactions is the possibility of obtaining liquidity on one’s own cash flows while transferring the risk to the market. This is no small matter: it allows the borrower, at his choice, to exit the transaction with a market liquidation. Just as banks do when they place credits, which they have in their bellies, to reinvest them in new operations.

How is it that, with these advantages, securitisation is almost completely unknown to most people?

The main problem is the volumes needed to start the securitisation project independently. Setting up a special purpose vehicle, registering it with the Bank of Italy, obtaining an ISIN, issuing the securities, drawing up a prospectus, obtaining external auditing, placing the securities: all this requires a cash flow of several million euros and cash to be advanced in consultants’ fees. The costs for structuring the transaction start in hundreds of thousands of euros.

For the first time, the share securitisation launched by iSwiss offers a solution to this problem. iSwiss, in fact, launches securitisation transactions in “sharing”, i.e. by collecting several cash flows from different borrowers to form a pool that has the necessary size to structure a securitisation transaction. Sharing also makes it possible to share the structuring costs, lowering the amounts needed to set up the project for each borrower.

Share securitisation, launched by iSwiss, has all the credentials to compete with bank financing and offer a new way of financing for small and medium-sized enterprises.