An analysis of secured debt

Stulz, Rent M.; Johnson, Herb

doi:10.1016/0304-405x(85)90024-8

Cited by 581 publications

(298 citation statements)

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“…James (1988) as well as Benveniste and Berger (1987) show that securitisation tranches resemble secured debt, whose agency costs may be lower than for unsecured debt (Stulz and Johnson, 1985;Berkovitch and Kim, 1990). …”

Section: Figmentioning

confidence: 98%

Asset Securitisation as a Risk Management and Funding Tool: What Does it Hold in Store for SMES?

Jobst

2005

SSRN Journal

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The following chapter critically surveys the attendant benefits and drawbacks of asset securitisation on both financial institutions and firms. It also elicits salient lessons to be learned about the securitisation of SME-related obligations from a cursory review of SME securitisation in Germany as a foray of asset securitisation in a bank-centred financial system paired with a strong presence of SMEs in industrial production. Keywords: securitisation, ABS, structured finance, SME JEL Classification: D81, G15, M202 "Just as the electronics industry was formed when the vacuum tubes were replaced by transistors, and transistors were then replaced by integrated circuits, the financial services industry is being transformed now that securitised credit is beginning to replace traditional lending. Like other technological transformations, this one will take place over the years, not overnight. We estimate it will take 10 to 15 years for structured securitised credit to replace to displace completely the classical lending system -not a long time, considering that the fundamentals of banking have remained essentially unchanged since the Middle Ages."Lowell L. Bryan 1 ObjectiveAlthough many financial institutions, large corporates, quasi-government agencies and even local governments and municipalities have recently begun to issue securitised debt on diverse asset classes, the securitisation paradigm has been largely confined to liquid asset types, which relegated the securitisation of SME-related payment obligations to sporadic captive finance transactions. However, in countries, whose industrial foundation is made up in large part by SMEs, such as Germany, asset securitisation would offer an interesting funding alternative to traditional channels of external finance captive to a pernicious bank-based financial system.The following paper acknowledges the topical nature of asset securitisation and probes the impact of attendant benefits and drawbacks on the refinancing decision of financial institutions and firms. It also elicits salient lessons to be learned about the securitisation of SME-related obligations from a cursory review of SME securitisation in Germany as pars pro toto of asset securitisation in a bankcentred financial system paired with a strong presence of SMEs in industrial production. The utility of this instructive yet succinct exercise is to set the stage for a comprehensive and purposeful debate about use of securitised debt as an alternative refinancing mechanism regardless of issuer size and financial system. The paper is structured as follows. After a brief definition of asset-backed securitisation (ABS) we describe the key benefits and investment risks associated with asset securitisation in sections 3 and 4. Section 5 specially focuses on the securitisation of SME-related claims, such as SME loans held by banks or trade receivables owed to SMEs. Section 6 provides a synopsis of the German approach to SME securitisation. Section 7 concludes.3 2 Definition of asset securitisation The motivat...

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Section: Figmentioning

confidence: 98%

Asset Securitisation as a Risk Management and Funding Tool: What Does it Hold in Store for SMES?

Jobst

2005

SSRN Journal

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“…The second covenant relaxes the first by allowing the firm to call the debt at no less than its face value, D ω . Both types of covenants are commonly employed with debt financing, where they serve the purpose of reducing under-investment problems (Smith and Warner (1979), Stulz and Johnson (1985)). 7 As will be apparent shortly, imposing these covenants also allows us to isolate critical aspects of subsequent financing decisions.…”

Section: Iia Modelmentioning

confidence: 99%

“…The debt is non-recourse to the assets-in-place, so existing secured debtholders are completely unaffected by the new secured debt issuance. This feature allows inside equityholders to fully internalize the benefits of investment, thus mitigating a possible underinvestment problem (Stulz and Johnson (1985)). Equity value associated with the new investment is thus E u =A u −B u ≥0…”

Section: Aiia Preliminary Model With Uncertainty In Future Asset Prmentioning

confidence: 99%

“…As a first step in the analysis, a theoretical model is developed that is an extension of Bester (1985,1987), and that also borrows directly from the work of Stulz and Johnson (1985) and Myers and Rajan (1998). In our model, firms are going concerns with collateralizable assets-in-place.…”

Section: Introductionmentioning

confidence: 99%

“…There are other ways to characterize secured and unsecured debt. For example, Stulz and Johnson (1985) focus on priority of secured debt without liability being limited to the value of any specific asset. Boot, Thakor, and Udell (1991) also focus on priority, and simply assume that unsecured debt generates a zero payoff in default while secured debt generates a positive payoff.…”

Section: Introductionmentioning

confidence: 99%

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