Legal Definitions - securitizable

Securitizable describes an asset or a stream of future payments that can be bundled together with similar items, transformed into a marketable financial product (known as a "security"), and then sold to investors. This process allows the original owner or lender to receive immediate cash instead of waiting to collect individual payments over an extended period.

• Example 1: Auto Loans

  Imagine a large financial institution that has issued tens of thousands of individual loans to customers purchasing new cars. Each of these auto loans represents a promise from a borrower to make monthly payments, including principal and interest, over several years. Instead of waiting for each individual borrower to pay off their loan over time, the institution can group a large number of these auto loans together. This pool of future payments can then be converted into a financial security and sold to investors. The investors receive a share of the future loan payments, and the financial institution receives a large sum of cash upfront, which it can then use to issue even more loans. In this scenario, the individual auto loans are considered "securitizable."

• Example 2: Future Rental Income from a Commercial Property Portfolio

  Consider a real estate investment trust (REIT) that owns hundreds of commercial office buildings across various cities. These properties generate a predictable and substantial stream of monthly rental income from numerous business tenants. The future stream of these rental payments is a valuable asset. To raise capital for new acquisitions or development projects without taking on traditional debt, the REIT could package these anticipated future rental payments into a financial product. Investors would purchase stakes in this product, receiving a portion of the future rent, while the REIT obtains a lump sum of cash immediately. This makes the future rental income from the commercial property portfolio "securitizable."

• Example 3: Expected Royalty Payments from a Patented Technology

  A technology startup develops a groundbreaking new software patent and licenses it exclusively to a major tech conglomerate. Under the licensing agreement, the startup is entitled to a percentage of the conglomerate's future sales generated by the patented technology (royalties) for the next two decades. While these future royalty payments could be substantial, they will arrive gradually over a long period. To fund immediate expansion, research, and development, the startup might decide to sell its contractual right to these future royalty payments to investors. By bundling these anticipated income streams into a security, the startup can convert a long-term, future income stream into immediate capital. Therefore, these future royalty payments are "securitizable."