The pool of financial assets (receivables) transferred to the special-purpose entity (SPE) or special-purpose vehicle (SPV), generates future streams of income. This income is used to pay for the securities issued by the SPE/SPV to investors who purchase or invest in these securities (the securitized product), and who look forward to receiving back their investment plus the promised interest or returns.
It is the servicer who performs the general service of making sure the investors are paid as promised. As the law says, “servicer refers to the entity designated by the SPE to collect and record payments received on the assets, to remit such collections to the SPE, and perform such other services as may be specifically required by the SPE.” (Section 3 [K] These “other services” include all those administrative functions related to the collection of the receivables generated by the asset pool, their remittance to the SPE, the payment by the SPE of the amounts due to investors of the securitized issues on time and in due course, and the accounting for and reporting of all these administrative transactions. It’s an essential service.
Many times, the originator entity, which initiated the creation of the original obligation generating the receivables, is designated as the servicer because of its familiarity with how the receivables were generated and with the obligors from whom collections are to be made. But if this is the arrangement, it is clear that the originator is acting as servicer only and specifically, and has neither ownership nor claim over such receivables or collections. If we must recall, the originator in a securitization transaction has sold financial assets, i.e., the receivables to the SPE that now owns the pool of assets.
The SPE in a securitization transaction can be a special-purpose trust (SPT) or a special-purpose corporation (SPC). An SPC is a stock corporation created solely for the purpose of securitization and to which the originator/seller makes a true and absolute sale. More frequently, the option chosen for an SPE is a special-purpose trust (SPT) that is administered by an entity, usually a bank, duly licensed to perform trust functions under the general banking law. This is a simpler option, and need not be registered separately with the Securities Exchange Commission (SEC). In this case, the Bangko Sentral ng Pilipinas is the regulatory authority that assures the proper fulfillment of the requirements of the trust/fiduciary responsibilities.
An important thing to note is that the SPT is a trust constituted for the sole purpose of purchasing assets, owning and holding the asset pool for a definite period until all of the asset-backed securities (ABS) issued for that particular asset pool have been paid.
So now we have identified the major participants in a securitization transaction: the originator/seller; the SPE, also known as the SPV; and the servicer.
The SPE is also known as the issuer when it issues the asset-backed securities (ABS) to the investors through the capital market.
But a major participant in securitization is the financial advisor who usually effectively initiates the transaction by explaining to the originator/seller the benefits of securitization and advises on the intricacies of preparing for and executing the securitization process. Most important, the financial advisor advises on the “structure” of the securitization to make the issue acceptable and saleable to prospective investors. When the financial advisor, at the same time, “guarantees on a firm commitment and/or declared on best effort basis the distribution and sale of ABS issued by an SPE”, he assumes the role of underwriter. In the Philippines this role is usually assumed by an accredited investment house.
Still another participant in securitization transactions is the credit-rating agency (CRA). A credit rating is an objective, independent third-party credit opinion on the probability of default of a securitization issue, using an established, publicized methodology that grades the creditworthiness according to an established, publicized rating scale. The CRA must be duly accredited by the SEC to be allowed to issue credit ratings.
Significant to note: “No ABS shall be issued unless such ABS has been rated by a duly accredited credit rating agency.”(Article VI, Section 43, The Securitization Act of 2004).