Overview

The following is a brief technical overview of securitization mechanisms for new issuances and project capital. The process of asset securitization is nearly identical across asset classes where for this overview, the focus is with regard to project finance.

Non-recourse structure. Project assets can be used to finance awe-inspiring large-scale multibillion projects via securitized asset backed issuances. The project is pledged as underlying collateral for an asset backed securitized new offering where, via a Special Purpose Vehicle a bespoke private placement is listed on an EU exchange and transacted via Euroclear Delivery vs. Payment procedure. Proceeds of sale are bifurcated into (i) sinking funds - which are designed to pay annual dividend interest and over time grow to retire the outstanding share par value; and (ii) proceeds, where net proceeds are designed to fund the project buildout in its entirety. The sinking funds create the non-recourse structure as they are specifically designed to retire any outstanding interest and redemption obligations.

Traditional financing methods such as construction or project loans, bank loans and undertakings, lease backs, venture, private equity, private investments, and governments are all complex, potentially dilutive, frequently exasperating and hugely time intensive. We offer innovative large scale project financing which obviates those layers of dilution and complexity, allowing you to focus entirely on your project buildout.

Securitization

Securitization is a technique used to transform liquid and illiquid assets/claims into new tradeable securities, most typically through a Special Purpose Vehicle “SPV” where the assets are transferred into a SPV where they become the underlying referenced collateral for new SPV securities issuances of their own. This provides the opportunity to securitize a diverse assortment of assets such as publicly traded assets (equities, bonds, options, funds and other listed products), risks linked to debt (loans, movable and immovable assets, real estate, wine, classic cars) and any activity which might be generated by claims or option contracts.

Securitization was devised to facilitate capital market transactions and/ or intra-group transactions, or a combination of both, but can also be used in the context of restructuring. Securitization acts not only as a means to raise cash on the capital markets, but also as a credit risk transfer tool. For investors, it provides attractive and diversified investment opportunities to participate in markets that are generally not available – such as: art, real estate, wine, bank loans, and sovereign instruments where investors can leverage and benefit from the lending and servicing expertise of originators. Moreover, removing loans from bank balance sheets can also have macro-economic benefits as banks can create more new lending, which has a positive impact on the economy.

Special Purpose Vehicle

As per the Regulation, a “Securitization Special Purpose Vehicle” or “SPV” means a corporation, trust or other entity, other than an originator or a sponsor, established for the purpose of carrying out one or more securitizations, the activities of which are limited to those appropriate to accomplishing that objective, the structure of which is intended to isolate the obligations of the SPV from those of the originator.

A securitization SPV provides a flexible corporate vehicle within which assets and liabilities can be ring-fenced or segregated. Therefore, the SPV is able to limit its liability with respect to a particular transaction or to a specified pool of assets rather than exposing all of the assets of the SPV.

The Appeal of Securitization

From a capital market perspective, securitization can provide additional investment opportunities to institutional investors with asset diversification, risks, returns, and duration profiles. The repackaging of non-liquid assets into new financial instruments enables conversion from illiquid to liquid securities with capital exits. Investors can therefore gain exposure to different asset classes and originators can gain access to liquidity where both originator and investors enjoy significant benefits.

Securitization Market

Securitizations are routine with a 2023 worldwide market greater than $9.3 trillion where the EU specific market is forecasted to be greater than €1.6 trillion.

The Association for Financial Markets in Europe “AFME” advocates securitization as a vital funding tool in Europe as a channel for originators to gain access to capital markets.

Industry Fundamentals

In its most basic form, securitization is the process whereby liquid or illiquid assets or rights are pooled and transformed into tradeable financial instruments that are sold to capital market investors. The pool of underlying assets or rights, also known as the “reference portfolio” or “collateral pool”, may be homogenous or heterogeneous. Interest and principal payments from the assets or rights are passed on to capital market investors through a securitization Special Purpose Vehicle (SPV). Reference portfolios may contain assets such as bond portfolios, equities (stock) portfolios, real estate developments, vehicle loans and leases, residential mortgages, commercial mortgages, credit card receivables, student loans, aircraft leases, or brand and franchise royalties that are generated by a company or a financial intermediary (the “Originator”).

– Securitizing Asset

The securitization process generally involves the assets or rights thereof to be transferred to the Special Purpose Vehicle Company. The SPV operates as a securitization vehicle which allows for the launch of multiple securitization transactions without incurring any risk of cross-contamination between multiple pledged assets and the different sets of creditors and investors for each. Therefore, the SPV is able to limit its liability in respect of a particular transaction to a specified pool of assets rather than exposing all of the assets of the SPV.

Securitization Entities

A securitization transaction involves institutional entities such as the EU Exchange, an Exchange licensed: (i) Nominated Advisor; (ii) a Lead Manager who is the facilitating Broker-Dealer Agent to coordinate the sale in a Euroclear/Clearstream DVP transaction; (iii) in country Legal Counsel to approve the offering documents including, but not limited to, ISIN Application, Term Sheet, Bespoke Prospectus or Private Placement Memorandum, and Information Document; (iv) appointment of licensed Securities Trustee for the Sinking Fund; (v) appointment by the Rights Agent of a “Protector” to the Sinking Fund; and (vi) an International Law Firm, to issue a Reliance Letter, if deemed necessary by the Exchange; (viii) Paying Agent, Calculation Agent among other such functions; (ix) Euroclear Facilitating Banks; and (x) other teams of legal advisors where of course all entities noted above are united in the common goal to effectuate and close the contemplated listing and transaction.

Securitized Preferred Perpetual Participating Offering

While certain asset classes are better suited for securitized bond issuances, project capital is ideally suited for securitized preferred perpetual participating offerings. Bond issuances have a date certain for maturity redemption while perpetual shares, about 80% of all preferred stock issuances are perpetual, have no maturity date where only a dividend is perpetually paid. The participation comes in for extra performance – often called a twin-win, which provides shareholders (the exit buyers) the opportunity to receive extra dividends for achieving predetermined financial goals.

This structure provides the means for institutional qualified investors to purchase the Perpetual Preferred Participating Shares where net proceeds are to buildout the project in its entirety without any repayment of proceeds such that the design post-closing is for the Sinking Funds to pay annual dividends and to grow to retire the outstanding share par value.

Cash Flow Waterfall-Sinking Funds

Most securitization transactions follow a predetermined schedule that prioritizes the manner in which interest and principal payments from the collateral portfolio must be allocated. This schedule, which is explained in the documents associated with the issuance (i.e. the PPM/prospectus) is known as the “cash flow waterfall” or simply the “waterfall”. In conventional waterfalls, senior tranches receive cash flows after payment obligations to securitization servicers (e.g. auditors, custodian bank etc.) are met.

Upon closing proceeds are segregated into: (i) net proceeds for project build out; and (ii) into 3 classes of sinking funds where collectively these funds are designed to effectively underwrite the share offering - funding both the annual dividend payments and to grow to effectuate a mandatory call option to retire the offering/maturity redemption obligation.

The sinking funds will have provided safety to the investors and the asset owner while effectively self-funding the project’s use of proceeds.

Our Services

Securitization has proved to be the refinancing and restructuring vehicle of choice in recent years. The purpose of doing so is to create a Euroclear or Clearstream Delivery vs. Payment eligible transaction where the proceeds are designed to fund the project development in its entirety.

OVO can guide you on the journey ahead. OVO is proud to offer an institutional team for securitization, through exit and post exit funding structures. Starting with your initial data, we execute initial compliance, structuring set-up, securitization, issued financial instruments, exit and post securitization funding structures. Our services encompass:

– Pre-Securitization

Preparation phase - due diligence and compliance. A clear understanding of the purpose of the transaction and the structure of the run-off securitization vehicle. OVO’s pre-securitization advisory services help to prepare portfolios for the securitization process by: Focusing on the objectives, needs, and requirements of titleholders, and investors.

– Creating the Listing and Exit

OVO executes by assisting, creating and coordinating legal advisors in drafting legal documentation, preparing listing documents, financial forecasts, set up of the securitization vehicle, confirmation of the tax treatment as applicable, coordination and execution with external institutional service providers i.e. Lead Manager, Underwriter-Nomad, Exchange, legal etc. for creating and implementing the prospectus / PPM and execution of the listing and exit.

The listing documents and legal process is extensive where upon completion, all are collectively submitted to the Underwriter-Nomad, Lead Manager and Exchange-CSD where the packages for the listing application, dematerialization, ISIN issuance, Financial Short Name, Classification of Financial Instrument (CFI) Code, suitability for trading, and submission to trading are finalized from where the listing is completed and is DVP eligible. Moreover, closing, banking and any conditions of sale clauses are executed thereon to satisfy any closing conditions from where the exit via Euroclear/Clearstream DVP procedure is completed.

– Post-Closing Sinking Fund

Post-closing of sale to qualified intuitional investors via Euroclear/Clearstream DVP, the Paying Agent executes requisite distributions, funds the Sinking Funds and the asset owner for the prtoject build out.

This structure provides the means for non-recourse financing of large scale projects to be built out in their entirety where the design post-closing is for the Sinking Funds to pay the annual dividends and to retire the outstanding share par value.

Contact us to learn more.