Clifford Chance

The Advantages of "Direct Debt" Securitization Structures

November 2, 2020

What is a “Direct Debt” Securitization?

In a typical securitization, loans or other financial assets are pooled together and securities backed by those assets are created and sold to investors. Upon the creation of each loan, proper steps must be taken in order for the lender (and hence the securitization trust) to have a security interest in the collateral securing the loan. For example, if the collateral securing the loan is real property, the lender must obtain and record a mortgage in order to have a first priority perfected security interest in such property.

In a direct debt securitization, the properties are owned by the securitization issuer, not by individual borrowers to whom loans are made. The issuer issues notes secured directly by the properties, and the senior notes are sold to investors (typically through an initial purchaser). Some portion of the junior-most notes are generally retained by the sponsor or its affiliates in order to satisfy the leverage requirements of the investors as well as to comply with risk retention regulations (if applicable). Mortgages are granted by the securitization issuer with respect to each property for the benefit of the securitization trustee. The right to receive lease payments on the properties are also pledged to the trustee as security for the notes, and the parent company of the issuer (generally the sponsor or an affiliate) may also grant a pledge of the issuer’s equity interests.

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