Sa Securitisation Development

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The South African legal aspects of cross-border securitisations

( 31 October 2005 )

Introduction

Despite significant growth in the domestic securitisation market in South Africa, certain economic risks and foreign exchange restrictions have restricted growth in the South African market for cross-border securitisation transactions. This article examines: what securitisation is; what its benefits are; the legislative development pertaining to securitisation in South Africa; the restrictions on the development of international securitisations in South Africa; and conclusions on the potential for South African corporates to access the international capital markets using securitisation.

1. Securitisation - the basics

Securitisation, literally means 'to turn into securities', and is the process by which a company converts various assets on its balance sheet into marketable securities which can then be sold to investors and traded in the capital markets. It is growing rapidly as a financing technique in the developing world, especially in South Africa.

Internationally, the types of assets securitised are those with a relatively predictable cash flow - for example, the income streams from home loans, vehicle loans, credit card and trade receivables, whole businesses, future flows, David Bowie's royalties and even James Bond movies. The securities resulting from a securitisation issue are known as asset-backed securities because they are backed by the underlying cash flows of a pool of assets.

The traditional securitisation transaction in South Africa can be reduced to three key steps:

• the company that originally owns the assets ('Originator') sells the assets to a specially formed company known as the 'Issuer';

• in order to purchase the assets, the Issuer raises money from the most competitive source - usually by issuing securities (either bonds or notes) secured by the cash flows of the underlying assets; and

• the securities are purchased...