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CS Professional · Strategic Management and Corporate Finance · Sources of Corporate Funding

In a securitisation transaction, what is the main purpose of transferring the receivables to a special purpose vehicle?

The SPV holds the receivables through a true sale, isolating them from the originator's insolvency risk, so investors depend on the performance of the pooled assets rather than the originator's credit standing. It does not remove the need for rating or credit enhancement.

  1. ATo make the originator liable for every default on the pooled receivables
  2. BTo isolate the assets from the originator's insolvency risk so that investors' returns depend on the pool's cash flowsCorrect
  3. CTo avoid any need for credit enhancement or rating of the securities
  4. DTo convert the originator's equity into debt

Explanation

The SPV achieves a true sale, placing the pool beyond the reach of the originator's creditors, so investors look to the pool's cash flows rather than the originator's credit. Securitisation typically still uses credit enhancement and rating, and it does not make the originator liable for all defaults.

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