Securitization of financial securities: a new way to diversify investments
The securitization of financial securities is an investment modality that has gained prominence in financial market. By means of securitisation, it is possible to group low-liquidity assets into more attractive securities, facilitating the exchange of hands between investors and boosting economic growth.
This financial technique allows investors to have access to a variety of assets with different risks and returns, making the financial market more inclusive and accessible to both Enterprise companies as for small and medium-sized businesses. But, after all, what specifically is the securitization of financial securities?
What is securitization of financial securities?
Imagine the following scenario: a company needs money to finance its projects but, due to the numerous debts of its clients, it does not have the necessary capital. As a way to advance the receipt of these funds and accelerate the implementation of the project, the company transforms these debts into negotiable securities, which are then traded with investors.
This process is known as securitization of financial securities, in which several types of credit are grouped into a single financial asset, called a security or security.
This can occur, for example, with student loans and real estate rentals: the “debt slices” are pooled to then be transformed into negotiable financial assets, providing investment and financing opportunities for companies and investors.
The same is true with credit card debts, whose balances can be grouped together to form a negotiable security that will be sold to investors in the financial market.
How does the securitization of financial securities work?
As we have seen, securitization allows some debts to become a way of raising funds for the company or institution that originally held them.
In short, the process involves the creation of a securitization structure, in which the transferor transfers its receivables to a separate entity, called a securitizer. This entity issues the debt-backed securities, which are then sold on the market with the endorsement of the Securities and Exchange Commission (CVM).
According to information released by BNDES, when the transferor decides to securitize his receivables, he seeks the following advantages:
- Financing of Working capital;
- Access to finance with high volumes of resources and longer deadlines;
- More attractive opportunity cost compared to traditional forms of bank lending;
- Diversification of funders, expanding the investor base to include pension funds, insurance companies, and others;
- Improved presentation of your financial statements.
An important characteristic of the securitization of financial securities is that debts are grouped into different classes or tranches, each with its own characteristics in terms of flow, term, risk, and payment priority.
For example, a senior-class financial security is considered less risky and has priority in receiving interest and principal payments. The subordinate classes, on the other hand, are considered riskier and receive payments only after the senior classes.
In any case, by acquiring one of these securities, the investor will essentially be acquiring part of the principal amount and interest of the underlying debt, in accordance with the terms and conditions established in the securities.
However, before starting the acquisition of investment securities in this area, it is crucial that investors analyze the factors that must be considered in this endeavor, such as their degree of risk appetite, the need for liquidity or not, personal traits (age, tradition, profile, etc.) and investment objective.
But why invest in securitized securities?
5 benefits of securitization for investors
The securitization of financial securities offers a series of benefits for investors, opening up new investment opportunities. Below, we highlight five important advantages for those who choose to engage in this market:
Diversification of investments
The securitization of financial securities allows investors to diversify their investment portfolios, since they can purchase securities backed by different underlying assets. This helps reduce the risk of concentrating on a single asset or sector, making the portfolio more resilient to potential losses.
Attractive return
Securitized asset-backed securities often offer attractive returns compared to other low-risk investments, such as government bonds. Securitization can provide investors with access to stable and predictable cash flows from underlying assets, such as mortgages, loans, and business receivables.
Reduction of credit risks
As securitized securities are structured in different tranches, investors can choose the level of risk that best suits their profile. Thus, they are able to reduce exposure to potential default compared to directly holding the underlying assets.
Increased liquidity
The securitization of financial securities can increase market liquidity, making it easier for investors to buy and sell the securities in the secondary market. This provides greater flexibility when managing your positions and adapting to changes in the market or your investment strategies.
Access to specific assets
Securitization allows access to specific assets that would otherwise be difficult to acquire. For example, the securitization of real estate loans can allow investors access to a diversified home mortgage portfolio, which can be challenging for an individual investor to purchase directly.
Securitization of financial securities in practice: successful examples
The securitization strategy for financial securities has been successfully applied in different sectors and regions, bringing benefits to both issuers and investors.
A classic example is the mortgage market in the United States, in which real estate loans are securitized and transformed into mortgage-backed securities.
Thinking nationally, the securitization of Agribusiness Receivable Certificates (CRA) And of Real Estate Receivables Certificates (CRI) has been an effective form of financing for the Brazilian agricultural and real estate sector, allowing the raising of funds with competitive interest rates.
According to Brazilian Association of Financial and Capital Market Entities (Anbima), securitization operations involving CRIs and CRAs had historical record for growth in 2022, increasing by 54% compared to the previous year.
In addition, the securitization of CRAs and CRIs can also help issuers to optimize their capital structure, refinance debts, and expand their funding sources, contributing to the development of these sectors in Brazil.
However, it should be noted that these financial instruments also have associated risks, and careful analysis of the underlying assets, the terms and conditions of the securitized securities is fundamental for making investment decisions.
How can technology minimize the risks and challenges of securitizing financial securities?
It's no secret that the securitization of financial securities can also present risks, due to the complexity in structuring the securities, the sensitivity of economic conditions, and the risk of default on the part of the original debtors of the debts.
Therefore, it is important to bear in mind that it is a complex and regulated process, subject to specific rules and regulations in each jurisdiction.
Technology, however, can help in minimizing these potential challenges. When we think of electronic signature, for example, we found an ally when it came to containing the risks of the securitization of financial securities.
In addition to promoting agility and security in the subscription, it also provides authenticity and integrity through cryptography, traceability with a record of the transactions, and legal compliance to the processes of signing and managing documents related to securitization.
Another way to enhance financial asset securitization transactions, such as Bank Credit Notes (CCBs), is through the Clicksign Securities. In addition to the electronic signature, the solution Securi it also allows you to generate and endorse CCBs electronically, without the need for an e-CPF, also generating an audit trail from origination to the end of the credit cycle.
That said, as seen above, Clicksign is the ideal solution to accelerate the growth of your business! So, if you want to find out which solution can help revolutionize your processes, Talk to an expert now.
