CONTENTS
- 1. Asset Securitization | Concept and System
- - Types of Assets and Requirements
- 2. Asset Securitization | Transaction Structure and Procedure
- - The Role of the Special Purpose Company
- - Asset Transfer and Securities Issuance Stages
- 3. Asset Securitization | Corporate Response Strategy
- - Disputes and Legal Risks
- - The Need for Advance Management and Legal Advice
- 4. Asset Securitization | Why Attorney Support Is Needed
1. Asset Securitization | Concept and System
Asset securitization refers to a financing structure in which a company issues securities backed by securitization assets that it holds but cannot readily convert to cash, in order to raise funds.
At its core, it turns future cash flows arising from operations, such as accounts receivable or rental income from real estate, into present value to support the flow of funds.
In Korea, the asset securitization system operates primarily under the Asset-Backed Securitization Act (the "Securitization Act").
This law was enacted to improve the efficiency of asset securitization and to protect investors, and it sets out special rules such as exceptions to the perfection requirements for asset transfers.
Disclosure obligations and supervisory regulation under the Financial Investment Services and Capital Markets Act are also legal requirements that must be met in an asset securitization transaction.
Types of Assets and Requirements
Assets that qualify for an asset securitization transaction must be expected to generate stable cash flows.
Typical examples include a company's accounts receivable, the loan claims of financial institutions, and rental income from real estate.
These assets must be legally transferable, and the legal rights to them must be clearly settled when they are transferred to a special purpose company (SPC).
In particular, if a defect in the rights to an asset comes to light during securitization, the entire transaction structure can collapse, so thorough legal due diligence must come first.
Key Financial Products
Asset securitization transactions make use of a variety of financial products. The main securitization products are as follows.
| Financial Product | Description | Key Features |
ABS (Asset Backed Securities) | Securities issued against underlying assets such as accounts receivable and loan claims | The most common form of asset securitization |
ABCP (Asset Backed Commercial Paper) | Securitized securities in the form of commercial paper for short-term funding | Supplies liquidity quickly |
MBS (Mortgage Backed Securities) | Securities issued against home mortgage loan claims | Mainly used in real estate finance |
ABL (Asset Based Loan) | A loan structure secured by specific assets | Carried out as a loan, without issuing securities |
Depending on a company's asset profile and cash flow structure, a securitization structure can be designed using a range of financial products.
2. Asset Securitization | Transaction Structure and Procedure
An asset securitization transaction is structurally more complex than an ordinary loan or bond issuance, and it involves many stakeholders.
Securing legal effect at each stage is therefore central to a company's risk management.
The Role of the Special Purpose Company
The heart of asset securitization is legally separating the company that holds the assets from the assets to be securitized.
To achieve this, a special purpose company (SPC) is established.
This entity is a special purpose vehicle set up solely to carry out the particular asset securitization transaction, and it creates a "bankruptcy remoteness" effect, ensuring that the securitized assets are not affected even if the company goes bankrupt.
Asset Transfer and Securities Issuance Stages
The asset securitization process broadly proceeds in the following order: selection of assets, establishment of the SPC, asset transfer, issuance of securities, and the inflow of investor funds.
When a company transfers its selected assets to the SPC, the transfer must satisfy the requirements for a "true sale" in legal terms.
If a transfer takes the proper form yet is found to amount in substance to no more than a secured loan, tax issues can arise.
The SPC then issues securitized securities backed by the transferred assets and completes the funding by paying the company the funds raised from investors.
Basic Practical Checklist for Asset Securitization
· Establishing a special purpose company (SPC) and registering it with the competent authority
· Concluding the asset transfer agreement and meeting perfection requirements such as notice of assignment of claims
· Drawing up the asset securitization plan and filing it with the financial supervisory authorities
· Credit enhancement and issuance of securitized securities (ABS, ABCP, etc.)
· Receiving investor funds and managing repayment of principal and interest
3. Asset Securitization | Corporate Response Strategy
When a company considers asset securitization, it should weigh the following factors together.
Review Factor | Key Points |
Securitization assets | Whether stable cash flows are generated |
Legal structure | Legality of the asset transfer and SPC structure |
Financial regulation | Financial Investment Services and Capital Markets Act and disclosure rules |
Tax structure | Tax risk and cost structure |
Investor protection | Compliance with investor protection rules |
In asset securitization transactions in particular, whether the asset transfer is genuine becomes a key legal issue, and the accounting treatment and applicable regulations can vary with the transaction structure.
Legal, accounting, and financial regulatory review is therefore needed at the transaction design stage.
Disputes and Legal Risks
Because asset securitization is a field that calls for sophisticated financial structuring, unexpected legal disputes can readily arise in the course of a transaction.
As capital market regulation tightens, the scope of a company's responsibility is also widening.
Disputes Over the Genuineness of an Asset Transfer
The most significant legal issue in an asset securitization transaction is whether the asset transfer is recognized as a "true sale."
If the terms of the transfer agreement or the way it is managed afterward are found not to carry a real transfer of ownership, a court may treat it as the provision of security rather than an asset transfer.
In that case, in the rehabilitation or bankruptcy of the company that holds the assets, those assets are folded into the company's estate rather than the SPC's, causing substantial losses to investors and leaving the company legally liable.
Investor Protection and Violations of Disclosure Rules
When issuing asset-backed securities, the disclosure obligations under the Financial Investment Services and Capital Markets Act must be strictly observed.
If the possibility that the underlying assets become impaired or the risk of fluctuating cash flows is not adequately disclosed, investors may bring tort claims for damages.
An investigation or sanction by the financial supervisory authorities can also damage a company's standing and may leave it unable to raise funds in the future.
From the design stage of an asset securitization, then, the adequacy of disclosure and compliance with regulations must be reviewed carefully.
Common Types of Legal Disputes in Asset Securitization
· Mis-selling of securitized securities and damages for breach of disclosure obligations
· Disputes over performance of trust agreements and asset management agreements
· Taxation issues from improper tax treatment within the securitization structure
The Need for Advance Management and Legal Advice
An asset securitization transaction is a complex deal that brings together corporate financial strategy, financial regulation, and capital market structure.
Where legal review is not carried out at the transaction design stage, the following problems can arise.
- Problems with the effect of the asset transfer
- Regulation and sanctions by the supervisory authorities
- Investor disputes
- Tax risk
In particular, because asset securitization can change the accounting treatment, the impact on financial statements, and the applicable regulations depending on the transaction structure, advance legal review is important.
4. Asset Securitization | Why Attorney Support Is Needed
Daeryun Law Firm provides comprehensive legal advice across the entire asset securitization transaction through a finance and corporate legal task force in which specialists in corporate finance, capital markets, tax, accounting, and intellectual property work together.
Daeryun supports companies in the following areas.
· Legal review of the assets to be securitized
· Advice on establishing and structuring the special purpose company
· Issuance of securitized securities and response to financial regulation
· Drafting and negotiating asset securitization contracts
· Responding to asset securitization disputes
Asset securitization is a financial transaction that directly affects a company's funding strategy and financial structure.
Where legal review is not carried out at the transaction design stage, various legal risks can arise, including problems with the effect of the asset transfer, violations of financial regulations, and investor disputes.
To preserve the full value of a company's assets and secure a stable flow of funds, you may book a 🔗legal consultation with a finance attorney for a comprehensive legal review from the outset.
