Securitized products

The income-generating assets of a company are pooled separately from its

balance sheet into a special-purpose vehicle (SPV), and the SPV issues a

security backed by the cash flow to be generated by such assets and sells the

security to investors. This method is called securitization. And the security issed

through such a proces is generally called a securitized product. Business

enterprises use their assets- such as auto loans, mortgage loans, lease

receivables, business loans, and commerical real astate- as collateral to back up

their securitized products. As defined by the Asset Liquidization Law, intellectual

property (such as copyrights and patents) also can be securitized.

When viewed from the standpoint of asset holders, securitization of assets has

the advantage enabling them to use the proceeds of the assignment or sale of

such assets they get at the time of issue in lieu of cash flow that may be

generated by the assets over a future period of years. In other words, asset

holders can convert uncertain incomes into a real fund. At the same time, the

practice offers asset holders the advantage of freeing them from the risk of a fall

in the price of their assets. In addition, in case any holder of a piece of less liquid

commercial ral estate wants to issue a security by putting up such ral estate as

collateral, such asset holder may easily sell the security by issuing it in small

denominations to atract a larger number of small investors.

When viewed from the standpoint of investors, securitized products give them an

additional choice of investment that have a new character. More specifically, first,

a security backed by a piece of ral estate gives them an opportunity to invest in

real estate that otherwise they cannont afford to buy outright with a small sum of

money. Secon, as asset holders can issue different grades of securities (the

senior/subordinated structure) at one and the same time by controlling credit

risks, they offer investors the opportunity to purchase a security that meets their

needs.

Basic mechanism of issuing securitized products

Generally, many of the securitized products are issued through a mechanism

describled belw. First, the holder of assets (originator)- real estate and account

receivable- that are to be securitized are assigned to a SPV. By ssigning them to

the SPV, such assets are separated from the balance sheet of the originator and

become assets of the SPV. An SPV takes the form of an association, a trust, a

special purpose company (SPC), or a special -purpose trust, and most of the

SPVs take the form of an SPC. To ensure the bankruptcy remoteness (to hold

the SPC harmless even when its owner goes bankrupt), the originator using the

SPC formula generally establishes an overseas SPC that a charitable trust that

uses a declaration of trust- a system unique to the Anglo-Saxon law- has, and

then establises a domestic SPC as a subsidiary of such overseas SPC. Those

who have a debt to the originator are called original obligors.

The next step is to formulate terms of issue of a securitized product to be issued

by the SPV. If the originator opts for the trust method, it issues beneficiary

cerfificates of a trust company. If it chooses the SPC method, it issues the kinds

of securities the SPC decides, but it does not have to issue them on one and the

same terms of isse. In short, it can design each with a different character by

differentiating the orderof priority with respect to the payment of interest and

redemption of principal, by varying maturities, or by offering the guarantee of a

property and casualty insurance company. By adding such wrinkles, the

originator can issue securities that meet the diverse need of investors. And

securities are called in terms of the order of priority for payment senior security,

mezzanine security, or subordinated security.

When the originator plans to sell its securitized products to an unspecified large

number of investors, it should make them readily acceptable to investors by

offering them objective and simple indicators (credit ratings) for independently

measuring risk involved in its securitized products. In addition, there are other