Law specialisms : Securitisation

Vincent Keaveny is a partner in the structured capital markets group of Baker & McKenzie’s London office. He has worked on securitisation transactions for more than ten years.

What is securitisation?

Securitisation is a form of financing that involves the creation of securities under which the payments of principal and interest are linked to the cashflows generated by a specific pool of assets. The type of securitisation transaction seen most frequently in the capital markets involves the securitisation of a portfolio of residential mortgage loans advanced (‘originated’) by a bank to its customers. In a typical transaction, the bank will sell the mortgage loans to a company specially established for the purposes of the transaction.

That special purpose company will raise the money necessary to purchase the mortgage loans by issuing bonds to investors in the capital markets. The payments of interest and the repayment of the principal amount, under those bonds to the bondholders will be funded by the payments of principal and interest received by the special purpose company from the mortgage loan borrowers.

What does the work involve?

As a financing technique, securitisation can be applied to almost any type of asset which gives rise to a predictable cash flow. Banks have used securitisation in relation to portfolios of vehicle loans and leases, loans made to corporate customers, credit card debts and commercial mortgages. Companies have also securitised their trade debts owing from their customers.
In a London-based securitisation practice clients will include leading international investment banks which arrange these transactions and market them to investors, banks and other entities that have portfolios of assets which they intend to securitise. Other parties to securitisation transactions may require legal representation including corporate trustees, financial institutions and individual investors.

In all of these cases, the demands made by the clients are very similar. They expect their lawyers to draft sometimes long and technical agreements in a short period of time, liaising with a large number of parties to the transaction and their legal counsel. Imaginative responses to legal and practical difficulties are required. For cross-border transactions, an ability to quickly absorb the legal issues arising in other jurisdictions and to assist foreign counsel in analysing and resolving local obstacles is essential. Enthusiasm, stamina and an ability to work in, and manage, a team are all necessary attributes.

What do trainees do?

A trainee working on a securitisation will usually be a member of a team of between two and five lawyers. The trainee will often have responsibility for specific aspects of the transaction and its documentation, sometimes taking drafting responsibility early on in the training contract under the supervision of a partner and/or associate. A high level of contact with clients and with other parties and their lawyers is commonplace, frequently focused on meetings or conference calls with a number of participants.

Securitisation has been at the heart of the global credit crunch and the subsequent global economic crisis. After two years during which investors were generally unwilling to buy securitisation bond issues, there is now once again market interest in these securities. During this period, banks continued to use securitisation as a funding technique and more recently companies have begun to turn to securitisation for their financing requirements, often when other financing options are no longer readily available.