What is Securitization: how does it work and what are the benefits

Securitization is a financial technique that has become quite popular in recent decades, allowing low-liquidity assets to be transformed into marketable securities in the financial market.

The legal framework for securitization in Brazil, established by Law No. 14,430/2020, seeks to promote the securitization market in the country, make it more attractive to investors and bring more legal security to the parties involved.

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Since it appeared and gained strength in the market, securitization has evolved a lot. What used to be a practice that started with companies with businesses based on the physical world, has become a common and widely carried out activity in the capital market.

What is securitization?

Securitization is the term used to refer to a debt that was negotiated with investors. It is a practice that seeks to transform credit securities, such as loan agreements, into negotiable securities in the capital market. Therefore, we say that the marriage between securitization and the capital market provides an expansion of the country's financial operations.

In addition, it's no wonder that the name refers to security. Who never had an idea thought about getting it off the ground but had no financial resources? Securitization can promote the independence of your business.

Securitization is used to describe the process in which companies raise financial resources in the market in exchange for the issuance of securities. This type of financial activity has the advantage of dividing a risk among several investors that would remain with only one creditor.

As a result, new names entered the securitization universe, such as the securitizer and the investor:

• Creditor: the transferor (or simply creditor) is the one who owns the debts receivable.
• Securitizer: institution responsible for converting receivables into backed securities: that is, it properly becomes a security available to investors.
• Investor: those are the ones who are going to assume the risks of the debt, in exchange for long-term returns.

In short, investors ensure that creditors receive their debts in advance, allowing for the rapid development of these companies, since it would take them months to receive these amounts, considering the possible defaults.

And what happens when a company's growth is constant? New opportunities appear! Securitization can enable this economic harmony to continue in accordance with independence, allowing long-term planning and reducing risks.

This video from ANBIMA — Brazilian Association of Financial and Capital Market Entities - shows how this sector works:

Securitization is a financial strategy accessible not only to large companies, but also to small and medium-sized companies, expanding investment options and contributing to the country's economic development.

Securitization examples

To better understand what securitization is, we brought two clear examples: one from an export industry and the other from a construction company.

When starting a business, developers have to invest a very high amount of money. The problem is that this capital takes a certain amount of time to return to the hands of the company that invested it. Therefore, they can resort to securitization.

Thus, contractors can sell their credits to a securitizer that then sells the securities to investors. The money obtained can make it possible to build the project, be it a mall, a resort, a commercial building or a residential one.

Here's another example of the use of securitization in the business world: think of an industry that works with exports. Now imagine that this company has high amounts to receive from its business. It can call on a financial institution to issue debt securities linked to those receivables.

In this way, the investor can buy one of these securities and receive an interest rate higher than that of Treasury Direct, for example, as a counterpart to the risk assumed in the transaction.

With the money it received from the securitization operation, this industry can buy machinery and expand its industrial power, as well as carry out other important measures for the business.

Securitization bonds

It is natural that, after all these details, the following question arises: which securities can be backed and issued by securitizers?

In fact, securitization is increasingly flexible, reducing bureaucracy even on dense issues such as the economy itself. It is worth highlighting the trading of best-known assets:

• Checks;
• Financing;
• Installments;
• Rentals;
• Loan agreements.

Some elements also make up the contractual parameters of certain securitization operations. Among them we can highlight the following:

• CRI — Real Estate Receivables Certificate: CRI is a type of security that aims to anticipate future credits that originate from real estate assets.
• CRA — Agribusiness Receivables Certificate: its function is the same as the CRI, but what changes is the sector. Instead of taking care of real estate debts, he deals with agribusiness debts.
• FIDC — Credit Rights Fund: this fund is a union of investors whose objective is to pool their resources in a single investment. It can be characterized as fixed income, that is, investors know in advance what its profitability will be.
• Debentures: Debentures are securities that companies issue to raise funds for the purpose of starting a specific project. Investors purchase the securities and then receive the money invested plus interest.

Advantages of securitization

Securitization is a financial strategy that offers several advantages for companies and investors. Below, we will detail some advantages, exploring how securitization can boost business growth and open up opportunities in the financial market.

Anticipating resources

For companies seeking growth, raising funds through securitization allows projects to be feasible more quickly. After all, in practice, it is not necessary to wait for accounts receivable to be in cash.

It works as a kind of “debt insurance”: even receiving the amount below the total due, the anticipation of these resources can provide income and market gain.

We can also say that for the borrower (the person or entity that requests a loan or contracts a debt) securitization does not make a noticeable difference. They don't realize that their mortgage, for example, is being traded on the financial market.

Better rates of return

Investors have the opportunity to study and seek the best rates of return when investing in securitizations. They receive the difference over the amount of the debt, including interest at the time the bond is paid off.

This transaction is carried out by financial market intermediaries, such as banks and traditional institutions, but it has also been gaining popularity among Fintechs.

In addition, investors in securitizations have the possibility of transferring their shares and, depending on the case, obtaining capital gains with this transfer. This provides flexibility and profit opportunities.

Less risk of loss for the debtor

Securitization presents a certain advantage for the creditor of the debt, since the risk of loss now belongs to investors. This means that, if the portfolio is of poor quality and if the cash flows are insufficient, it is the investor who will have the loss.

More asset liquidity

Another advantage of securitization is the transformation of an illiquid portfolio into liquid. This makes it possible to sell it not only to one investor, but to several, especially in the fund market.

Balance sheet management and inflation control

Securitization allows the management of the balance sheet, allowing the transferor (the company that originates the debt) to control inflation if it is excessive. This can be done by increasing activity and generating new assets while keeping the balance sheet under control.

Finally, investors can transfer their shares and, depending on the case, make capital gains.

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Securitization and Bank Credit Notes

In the language of the financial market, there is a lot of talk about CCB Digital. The Bank Credit Bill is a security issued by an individual or legal entity to a financial institution. It is a promise to pay in cash resulting from a credit transaction.

Thus, since CCB is a credit instrument, that security can also be transferred to other creditors through endorsement. The securitization of CCBs is a way for banks to transfer part of the credit risk of lending operations to investors who buy these securities. In this way, banks are able to reduce their level of exposure to risks and free up capital for new operations.

In addition, such titles can be used in different modalities of credit operations.

Clicksign in securitization

An important technology for securitization is electronic signature, which provides security in the authentication process of the people who are signing the operation and also guarantees the integrity of the signed document. This makes securitization with CCBs much safer, since through it it it is possible to back up the commercialization of CCBs, thus reducing investor risk.

At Clicksign, the solution Securi allows not only to sign, but also to generate and endorse CCBs electronically, without the need for e-CPF.

Incredible, isn't it? Therefore, if you are interested in the subject and want to know more about how Clicksign Securi it can revolutionize your processes, click here and talk to an expert.