Global Capital Markets Center
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The Alchemy of Asset Securitization Steven L. Schwarcz 1 Stanford J. Law, Bus. & Finance 133 (1994) |
- See also:
- The Global Alchemy of Asset Securitization(described in 2nd abstract)
- 14 Int'l Financial L. R. 30 (May 1995)
The Alchemy of Asset Securitization
In securitization, a company partly "deconstructs" itself by separating certain types of highly liquid assets from the risks generally associated with the company. The author takes an analytical and rather common sense legal approach to understanding asset securitization. This article explains asset securitization and shows how companies can use it to gain direct and indirect benefits. More importantly, this article not only demonstrates that securitization can enable certain companies to achieve a genuine reduction in financing costs by providing access to lower cost capital market funding, but also explores other potential innovative uses of this financing technique. The article begins by describing the asset securitization process and then continues to show how companies directly and indirectly benefit from securitization. Most importantly, the article explains why securitization enables many companies to raise funds at a lower cost than through traditional financing. The discussion then turns to the differences between securitization and factoring, an antecedent financing technique. The article then addresses its core question: is the securitization process a zero-sum game or does it truly reduce net financing costs? The short answer is simple: securitization is an alchemy that really works. The company can then use these assets to raise funds in the capital markets at a lower cost than if the company, with its associated risks, could have raised the funds directly by issuing more debt or equity. The company retains the savings generated by these lower costs, while investors in the securitized assets benefit by holding investments with lower risk. The article concludes by describing those areas where securitization opportunities have yet to be fully explored.
The Global Alchemy of Asset Securitization
Not only is asset securitization one of the most important financing vehicles in the United States, but also its use is rapidly expanding worldwide. This article is based on the above article but revised for an international audience.
Article available on Westlaw (Citation No. 1 STNJLBF 133) and LEXIS (Citation No. 1 SJLBF 133).
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