The Alchemy of Asset Securitization
![handle is hein.journals/stabf1 and id is 139 raw text is: The Alchemy
of
Asset Securitization
Steven L. Schwarcz
This article explains asset securitization and shows how companies
can use it to gain direct and indirect benefits. More importantly,
this article demonstrates that securitization can enable certain
companies to achieve a genuine reduction in financing costs by pro-
viding access to lower cost capital market funding. This article also
explores potential innovative uses of this financing technique.
[Asset securitization is] becoming one of the dominant means of
capital formation in the United States.'
- Securities and Exchange Commission (1992).
ot only is asset securitization one of the most important financing
vehicles in the United States, but its use is rapidly expanding
worldwide. What is this innovative approach to financing that
has taken the country, and begun to take the world, by storm?
This article explains asset securitization and its unique benefits. The arti-
cle begins by describing the asset securitization process and then continues to show
how companies directly and indirectly benefit from securitization. Most impor-
tantly, the article explains why securitization enables many companies to raise
funds at a lower cost than through traditional financing. The discussion then turns
to the differences between securitization and factoring, an antecedent financing
technique.
Steven L. Schwarcz is a partner and chairman of the structured finance practice
group at the law firm of Kaye, Scholer, Fierman, Hays & Handler, and also teaches courses in
commercial law, bankruptcy, and finance at the Yale and Columbia Law Schools. He gratefully
acknowledges the research assistance of Howard W. Brodie, Yale Law School Class of 1994,
and Eric L. Aaronson, New York University Law School Class of 1995, and also expresses
thanks to Ian Ayres, Clive D. Bull, Frank J. Cavallo, Jason H.P. Kravitt, Oussama A. Nasr, Jo-
anne Rose, Alan Schwartz, Paul M. Shupack, and Leslie M. Wertheim for their helpful comments
on drafts of this article.
Investment Company Act, Release No. 19105, [1992 Transfer Binder] Fed. Sec. L.
Rep. (CCH) T 85,062, at 83,500 (Nov. 19, 1992) (provided in connection with the issuance of
Rule 3a-7 under the Investment Company Act of 1940). The terms securitization, asset secu-
ritization, and structured finance are used interchangeably. Each refers to a company's use
of cash flows from its assets to raise funding. The term securitization specifically refers to
the issuance of securities backed by such cash flows.](ViewImageLocal?handle=hein.journals/stabf1&div=13&collection=&method=preview&ext=.png&size=3)
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The Alchemy of Asset Securitization
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