By CLAIRE A. HILL *
Washington University Law Quarterly | Winter, 1996 | Vol. 74, No. 4, 1996
Securitization 1 was invented in the early 1970s. 2 Since then, the transaction volume has exploded. By the end of 1994, more than $ 1.9 trillion securitization securities were outstanding, and more than $ 500 billion of securitization transactions were done in 1994 alone. 3 And securitization is expected to remain a significant source of financing in the years to come. 4
Securitization is a technique firms use to raise financing. In securitization transactions, financiers purchase securities payable from collections on a firm’s receivables. Contrasted with many other financing techniques, securitization looks very complex. 5 Complexity is rarely, if ever, costless. If financing decisions are made rationally, securitization transactions must offer benefits that simpler financing techniques do not.
Practitioners tout securitization’s ability to enable: (1) a low quality firm to, in effect, issue high quality securities, and (2) cash flow streams saleable only at sizeable discounts on lower priced financial markets to be transformed into securities saleable at much smaller discounts on higher priced capital markets. 6 The claim, more generally, is that securitization is a method for packaging cash flow streams of receivables for higher valued (and higher priced) uses, at a cost lower than the increment of value added. 7
The famous Modigliani and Miller capital structure irrelevance theorem holds that capital structure – the way a firm carves up its cash outflows into one or more layers of debt or equity – is irrelevant to firm value. 8 Financing transactions, such as securitization, are the …
133. See Michael Carroll and Alyssa A. Lappen, “Mortgage-Backed Mayhem,” Institutional Investor, July 1994, at 81.
225. Caroll & Lappen, supra note 133, at 81.
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