Let’s take a commercial company that
holds a debt with a third party that has fallen due.
This debt is unlikely to be realised at face (nominal, or
initial) value because the maturity has expired, and because
of the risks in relation to the borrower or the statistical
spread of risk related to the debt. It will therefore only
be repaid in part, or not at all.
A decrease in value or a reserve must be recorded by the commercial
company so as to comply with the principle of Fair Value.
This decrease in value or reserve will clearly affect the
results or the equity of the commercial company.
It is now possible to set up a securitisation vehicle in
Luxembourg to which the commercial company will be able
to transfer ownership of the debt, together with the non-collection
risks attached to it.
The securitisation vehicle will then pay the commercial
company the value of the debt, factoring in a certain discount
or price reduction based on the recovery risk inherent in
the debt.
Consequently the company will be relieved of this asset
and will be able to receive a sum, (which of course will
be lower than its nominal value), but it will at least be
able to release cash that had been tied up.
The company will thus be able to reduce its balance sheet
and recover the asset at its current value. Consequently,
the decrease in value or reserve for decrease in value of
the debt may be cancelled since the risk itself will have
been removed from the balance sheet. This will result in
an improvement in the firm's cash ratios and earnings for
the financial year.
The securitisation vehicle is set up in Luxembourg by one
or several persons who put up the financing and who assume
any future risks in relation to the debt. The debt has been
assigned by the commercial company by means of a discount
negotiated according to the risks, the maturity, the possible
return and the rating of the borrower.
As owner of the debt, the securitisation vehicle will receive
the interest, any incidental charges and the repayments
arising from it. The securitisation vehicle will make regular
or one-off payments of the income generated in the management
of the debt to the investors after deducting all charges,
management fees and losses related to recovery.
The securitisation vehicle is set up as a securitisation
company or securitisation fund (either in co-ownership or
under the Luxembourg fiduciary system).
The other examples cited in the appendix will show that
the securitisation vehicle may securitise an extremely wide
range of risks connected to every type of asset (tangible
and intangible, fixed and movable assets, financial, risks,
etc ). In addition, a detailed explanation will be given
of the taxation of such operations.
