Understanding corporate finance: raising finance: selling debt assets
Making debt saleable
A company with a deposit account with a bank has an asset. If it wants cash now it could look to this asset. But the terms of the account might mean that the company cannot withdraw its funds and a deposit account is not an asset that could easily be sold to realise cash. The company needs to find a way of raising money by making this asset marketable.
The debt has to be transformed from simple debt, that is, ordinary lending and borrowing between two parties, into a tradeable instrument. At its simplest an instrument is simply a piece of paper which records and provides evidence of an obligation to do something. In the case of a debt instrument, it records the obligation to repay an amount. If the piece of paper can be sold so that someone other than the original lender can collect the debt, we have a tradeable instrument or a security. You should note that security has specific definitions for tax purposes in some areas, such as capital gains tax.
If, instead of a normal deposit account, a company paid money to the bank and obtained a piece of paper as evidence of the deposit and the right to interest and repayment, it might be possible to sell these rights. If this ‘piece of paper’ or certificate can be sold, it will be possible to turn the account into cash when it is needed.
Turning simple debt into marketable securities in this way is securitisation at its simplest.