A True Sale, in the context of financial transactions like securitization, is a legal and accounting designation. It signifies the complete transfer of ownership and all associated risks and benefits of an asset from the originator to a purchaser. This transfer legally separates the assets from the originator’s balance sheet, particularly relevant for bankruptcy remote structures.
Mechanism
To achieve true sale status, the transaction structure must legally and economically isolate the transferred assets from the seller. This typically involves satisfying specific criteria, such as the buyer having full control over the assets, the seller retaining no beneficial interest, and the transaction being treated as a sale rather than a secured loan for accounting purposes. Legal documentation and asset transfer mechanisms are precisely structured to meet these requirements.
Methodology
The methodology for executing a true sale aims to mitigate credit risk for the asset purchaser and remove assets from the seller’s balance sheet, often improving their capital ratios. This strategic financial engineering provides bankruptcy remoteness for the transferred assets, meaning they are protected from the originator’s creditors if the originator becomes insolvent. It underpins the structural integrity of many asset-backed financial products.
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