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Home » What are the cons of securitisation?

What are the cons of securitisation?

Securitization, while offering various advantages, comes with its share of drawbacks that businesses should consider. One significant disadvantage is that it could limit the ability of a business to raise funds in the future. By securitizing assets, a company essentially ties up those assets, making them less available as collateral for future loans or financing endeavors. This restriction on liquidity can hinder the company’s flexibility in responding to changing market conditions or seizing new opportunities. Moreover, if the business experiences a sudden need for capital, the process of unwinding the securitization arrangement to regain access to those assets can be complex and costly.

Another drawback of securitization is the potential loss of direct control over assets. When assets are securitized, they are often transferred to a special purpose vehicle (SPV), effectively separating them from the company’s main operations. While this can provide certain benefits, such as risk mitigation, it also means relinquishing direct control over those assets. This loss of control may lead to inefficiencies in managing the assets or responding promptly to market changes. Furthermore, in the event of an initial public offering (IPO) or sale of the business, the reduced control over assets securitized may lower the overall valuation of the company, as investors may perceive it as having fewer tangible assets under direct ownership.

Lastly, the process of reclaiming securitized assets can incur significant costs. If a company decides it needs to retrieve the assets held within an SPV, it may face substantial fees and expenses associated with unwinding the securitization arrangement. These costs can include legal fees, administrative expenses, and potentially even penalties or premiums for early termination of contracts. As a result, the decision to securitize assets should be carefully weighed against the potential long-term costs and implications for the company’s financial health and flexibility.

(Response: In conclusion, while securitization offers benefits such as risk transfer and access to capital, businesses must carefully consider the potential drawbacks. These include limitations on future fundraising, loss of direct control over assets, and the significant costs associated with reclaiming securitized assets. Assessing these factors comprehensively is crucial for making informed decisions regarding securitization strategies.)