SECURITIZATION & BANKRUPTCY REMOTE:

Securitization: In simple terms securitization is to sell the receivables of a loan to a

company that offers upfront cash for such future receivables. For example: You are
running a company that is into vehicle financing whereby you have financed cars to various
entities (individuals & corporate borrowers on hire purchase) ranging from one year to
seven years (loan tenures). The lending could be 80% of the vehicle cost. You could have
received the future payments by way of PDCs (post dated cheques) or thru ECS (direct
debit from the borrowers bank account; Electronic Clearing Services). Lets also assume
that your total receivables are Rs.500 crores over these seven years (based on the longest
loan tenure). For some reasons you are having financial problem wherein you are in need
of immediate cash-flows into your business. Instead of taking a fresh loan or trying other
types of credit you would approach a lender who would offer to bail you out by offering
you to securitize the loan receivables by paying you an upfront cash of lets say 80% of
the receivables which would be Rs.400 crores. Since you would be getting this money
upfront which helps you in sailing over the crisis you would agree to securitize the assets.
The receivables by way of future EMIs would be routed to the securitizer (the company
that lent you the funds). Both of you (borrower & the lender) would use PTC or Pass Thru
Certificate to ensure that the EMI money will be realized by the lender (the EMI credit hits
your account and simultaneously it gets transferred to the securitizers account). Ensuring
the future monies reaching the lender is your responsibility as also any defaults by way of
non-payment would have to be met by you.
This is also part of financial restructuring (securitization) of companies that get into
financial problems
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Bankruptcy Remote: This term is usually used in connection with Securitization.
Bankruptcy Remote is a situation when a particular company that is part of a group company is not
affected if the entire group is facing a severe financial crisis leading to bankruptcy. This healthy
company will be made as a Special Purpose Vehicle or Special Purpose Entity kept away from the
proceedings. This is to keep away the company without putting the entire firm at risk. A Special
Purpose Vehicle (SPV) or Special Purpose Entity (SPE) is created and made as a subsidiary company
with an asset/liability structure and legal status that makes its obligations secure even if the
parent company goes bankrupt. Such SPEs are created in such a manner that they do not come
under any legal obligation even by the creditors in case the assets have to be seized as part of
other companies that are in financial trouble.
Bankruptcy-remote entities are widely used in securitizations and other types of transactions in an
attempt to isolate an asset (often loan collateral) from the risks and disruption of a bankruptcy
proceeding. Bankruptcy lawyers have long warned that bankruptcy-remote entities are not
bankruptcy-proof and, when legitimately in financial distress, may become debtors. But a recent
decision of the United States Bankruptcy Court for the Southern District of New York in the Chapter
11 proceedings of General Growth Properties, Inc. and its affiliated debtors raises the question
whether these entities should even be considered bankruptcy-remote.
In India such entities are not is vogue as on date; perhaps they have not yet begun.