Meaning of securitization
The word securitization relates to negotiable instruments and securities.
Securitizing is converting debts a creditor is entitled to receive from its debtors into assets for investors through the sales of securities.
In other words, securitization is the process for investors to buy debts from creditors. This way, the advanced payment of such debt is assured to the creditor, and the debtor starts to have an obligation to the investor.
But what is the real role played by this process?
In this article we will show what securitization is, how some types of it work, and if this process can be beneficial to your company.
How it actually works
Suppose you have a company, need capital to invest in your projects and has different resource receivables as debts from your customers.
Waiting for your debtors to pay you may not be that good and even disturb promising projects.
In addition, these debtors may never pay you. In such scenario, securitization emerges as an excellent option, particularly for companies not wanting to make traditional loans.
The process is simpler than it seems - the creditors transforms its receivables into securities and negotiate with investors.
In this kind of operation, your company receives the advanced value of the receivables it has and ends its relationship with the debtor. However, you receive a value lower than the total receivables you would have in the future. This difference may be understood as the “commission” of the investor for being exposed to the risks posed in taking the debt your clients had with your company.
Broadly speaking, this is how we can define the parties included in the securitization:
- Assignor: company that owns the receivables. It can work in any area, such as trade, real estate, industry, etc.
- Securitization company: it is the institution responsible for transforming the receivables from a creditor into negotiable securities, playing the role of a mediator.
- Investors: people who will buy these securities, taking the risks, and, in exchange, enjoying the possibility of higher returns per investment.
But is the process profitable or not after all?
Some variable factors can make securitization a different process for each company, but, in general, it is highly beneficial for creditors.
- For companies, securitization can be profitable, as the risk of the debt not being paid is completely taken by the investor.
- There is room for selling these securities to different investors, moreover to the investment fund market, greatly extending the company's capability of rapidly being paid its receivables.
- The only disadvantage for the company is the cost of the process. However, the more immediate capital raising from securitization a company has, the more it can invest in its projects and obtain more significant return in the medium and long term.
What is FIDC?
FIDC is the acronym for Fund of Investment in Receivables. It works as a gathering or co-ownership of different investors who, with the same purpose, combine their resources in a common investment for all.
Receivables are credits companies are entitled to receive, such as rents, checks, bills or values to be paid in installments by credit card. These debts are converted into securities and sold to third parties.
FIDC Advantages and Disadvantages
- Credit risk: as it includes receivables, there is room for consumers to delay the payment or even never pay the debt. These factors lead to decreasing the earnings of the fund's investors.
- Liquidity risk: as it is a less common investment in the market, there is risk of low demand for the interest that is intended to be sold to the fund's investors. For this reason, it is important to keep monitoring the negotiations of the interest of FIDC funds in the market.
- Market risk: when it comes to market risk, we are speaking of the factors directly and indirectly influencing the market, causing changes in the price and profitability of the assets the fund has. An example is the drop or increase in the interest fee that can affect the price of securities with receivables.
How CRI works
The Real Estate Receivables Certificate, known as CRI, refers to a security giving to its owner real estate receivables that, at some point, can be converted into money.
The CRI is generally used for raising resources aiming to finance real estate market transactions. In other words, it is backed in real estate receivables, such as housing, commerce or construction financing, long-term rent agreements, financing agreements, rental, leasing, or any other type of transaction with a real estate property as payment guarantee.
A simple example of CRI is when a developer decides to market a pre-construction building, granting a longer term for buyers to pay for it. These receivables from the sales of the building can be channeled into a CRI that can be sold to market investors.
What is the relation between securitization and CRI?
In such context, securitization would be the process of transforming the debts of those who, through financing, bought the pre-construction apartments into real estate securities that could then be marketed among investors.
In other words, the creditor, i.e., the development company, would receive the money from the debts in advance. And the debtors, i.e., the people who bought the apartments under financing, would directly pay the investors who purchase the securities.
The real estate receivables certificates are provided for in Act no. 9,514, of November 20, 1997, which authorizes securitization companies to purchase, issue and trade these securities in the financial market.
How does CRA work?
The CRA or Agribusiness Receivables Certificate is backed by receivables arising from agriculture business (or their cooperatives) and third parties.
In general, it includes financings or loans related to manufacturing, marketing, perfecting or industrializing products, machines, implements and inputs used in agribusiness.
Securitizating CRA works similarly to the CRI - the debts are transformed into securities, which are then marketed among investors.
Securitizations available in the capital market
We currently have four main types of securitization in Brazil:
- Financial Receivables Securitization: in financial credit securitization, the assets undergoing securitization are loans, financings, leasing, and mortgages.
- Real Estate Receivables Securitization: the assets undergoing securitization are real estate receivables.
- Agribusiness Receivables Securitization: the assets undergoing securitization are agribusiness receivables.
- Corporate Assets Securitization: in the case of corporate assets securitization, the assets undergoing securitization are checks, bills, installments, loan agreements, rentals, consumer credits, credit card sales, among others.
Why should a company look for securitization?
The main advantage of choosing securitization in a company is being free to invest in new projects when advancing receivables and being assured there will be no default by its debtors.
For this reason, securitization is an alternative increasingly chosen in the market: those looking for financing transform the credits they should receive in the future - when marketing their project - into securities, which, in their turn, are traded to investors, either individuals or companies.
These securities, in their turn, are sold in the capital market as fixed income securities, and those buying them count on an investment with a structure full of guarantees and controls, which brings more safety and profitability on the resource invested.
Companies choosing securitization have different advantages – liquidity, cash flow, and project feasibility.
My company looks for securitization, what now?
When looking for securitization services from banks, it is essential to observe all information the companies offering the service make available on their websites, including history, shareholders' profile, and operations carried out.
It is also important to analyze how a company is mentioned in reliable means of communication to be aware of the quality of their work.
Another point is understanding the focus of the bank. If it works nationally and internationally, what services it offers and guarantees it grants.
In general, it is important to have a complete map of the opportunities and possible partners, in addition to checking if the company chosen is transparent with its customers.
Banco Master de Investimento
When choosing a securitization service, it is important to look for banks presenting, among its focuses, this working area and, as a consequence, being prepared to make better offers, giving room to reliable and safer partnerships.
Banco Master de Investimento is born to outstand in securitization operations, proposing practical structures and legal solutions for small, medium, and big companies.
Starting a new business is not easy, and keeping it working, despite all bureaucracy, risks, losses and uncertainties, is a hard task. Having a bank providing this kind of service as a partner brings safety and freedom to start new ventures and extend your business.
Does it work for my business?
If your main goal is boosting your company, having freedom to start new projects, and being sure you will be paid by your debtors, it may be interesting to contact a bank and choose securitization services.
One of the main advantages of choosing securitization is the possibility of getting resources without any need to make a loan, but using an amount the company already has. What this operation makes is only advancing these values that would be paid in the future.
This way, managers do not need to compromise their cash with one more liability, while they have room for increasing their activity, creating new assets for their business.
In addition, it is also possible to have more control on the balance sheet, improving it. All this process must be conducted by financial institutions specialized in securitization, performing operations safely and transparently.
The fact the resources are negotiated in the market does not affect customers. The only change is they start to pay the debt to a different creditor, without any loss.
Now that you know the advantages of securitization, what do you think of looking for an institution that can assure maximum safety and freedom in this operation?
Banco Master de Investimento is here to be your partner in this journey and help your company reach the best results!