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What is Securitization?

Securitization is a process whereby assets are pooled together and securities are issued against those assets. This is particularly done in the case of mortgages and home loans.
The holder of the home loans creates a Special Purpose Vehicle (SPV), and the assets are transferred to this SPV. The SPV now issues securities against these assets. The money paid by people investing in these securities goes to the company originally holding the assets, and the cash flows from the assets, generally installments, go to the people holding the issued securities. The company can get the assets of its balance-sheet and also issue fresh loans with the money collected by issuing securities. Also, securitization helps a company issue securities with a credit rating that is not linked to its own credit rating, but rather linked to the quality of the assets.

How does the World Cup come into the picture?

Securitization is used as a tool of risk mitigation; a company mitigates the risk of future receivables by issuing securities against them. FIFA started thinking in terms of securitizing its World Cup earnings from 1999 onwards. The costs of hosting a World Cup in two nations (World Cup 2002 in Japan and Korea), was substantially larger than in previous editions of the competition. The situation was compounded by the marketing revenue losses incurred due to the bankruptcy of FIFA's marketing partner ISL, and the September 11th World Trade Center attacks. An outcome of the 9/11 attacks was that insurance companies cancelled the contracts for the 2002 World Cup and asked for larger premium payments. FIFA then went in for a securitization of its earnings from marketing rights of the 2002 Japan-Korea and the 2006 Germany World Cups. The deal was valued at $260 million and was structured by the investment bank Credit Suisse First Boston.

The figure of $260 million were only FIFA's estimated earnings by selling marketing rights for the two tournaments and were about 15% of the FIFA's total earnings from the two tournaments; any revenue earned from selling marketing rights in excess of $260 million were to directly go to FIFA. The securities issued as a part of this securitization process were given a high investment grade of A3 by Moody's. FIFA used the funds earned through this securitization to pay-off existing loans, create reserves and invest in equity.

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* Contributed by -
Saurav Chatterjee,
1st Year Student, PGDM,
IIM Calcutta.