The Law on Securitization comes into effect in Georgia

Georgia has established a legal framework governing securitization, a process that enables the transformation of future receivables into liquid financial instruments. The Law on Securitization outlines how entities can package income-generating assets and offer them to investors through structured instruments.

The framework sets clear rules for key participants, including originators (Initiators), securitization vehicles (Securitization Entities), and investors. It also details the roles of regulatory authorities and defines procedures for both traditional and synthetic securitization.

Definition of Securitization

Under the Law, securitization refers to a process in which the initiator (an entity seeking financing) transfers its underlying assets (any future foreseeable income) to a securitization special purpose entity (the Securitization Entity) in exchange for funding.

The Securitization Entity then issues securitization instruments (including securities, other financial instruments, units of a securitization fund, shares of a securitization company, etc.), and investors (the Investors) acquire these instruments to earn specific income. The Law governs all three parties involved: Initiators, Securitization Entities, and Investors. In certain cases, securitization proceeds without involving a Securitization Entity (as outlined below).

Securitization Entity and Its Role

The Securitization Entity is a legal entity or an organization (without legal entity status) that, by purchasing underlying assets or through other means (such as derivatives), takes on the credit risk associated with these assets.

It then issues securitization instruments to raise funds for acquiring this risk. The value and/or profitability of these instruments depend on the mentioned risk. Securitization Entities can take the form of either a securitization company or a securitization fund.

These entities engage exclusively in activities directly related to securitization, such as acquiring underlying assets, managing risks, and issuing securitization instruments. The National Bank of Georgia (NBG) regulates the securitization market and oversees Securitization Entities.

You can find more information and official guidelines on the National Bank of Georgia’s website.

Under the Law, a Securitization Entity must obtain authorization from the NBG if it makes a public offer or involves more than 20 non-qualified investors. The NBG charges an authorization fee of GEL 5,000. Entities that do not require authorization must still notify the NBG before starting operations. Similarly, Initiators conducting securitization without involving a Securitization Entity must inform the NBG in advance and limit their activities to private offers with fewer than 20 inexperienced investors.

Investors and Their Role in Securitization

The Investor may be an individual, a company, or an organization (without legal entity status) that holds a risk position in securitization through securitization instruments.

The law differentiates between inexperienced, experienced, and institutional investors. Other legislative acts regulating the securities markets have already used the terms inexperienced and experienced investors; however, the Law introduces the term institutional investor (the Institutional Investor) as a new concept.

The Law defines an inexperienced investor as anyone who does not qualify as an experienced investor under the Law of Georgia on Securities Market (the Securities Market Law). According to this law, experienced investors are individuals or entities with sufficient financial resources, expertise, or income to absorb potential investment losses. This category includes individuals with substantial assets, financial institutions and their directors, legal entities with capital exceeding GEL 1,000,000, or those formally recognized as experienced investors by the National Bank of Georgia (NBG). The Law also introduces a new category, the Institutional Investor, which includes investors that meet any of the following criteria:

• A commercial bank;
• A microbank;
• A microfinance organization;
• An insurance organization;
• An asset management company or registered/authorized investment fund;
• A brokerage company;
• A person acting on behalf of the pension scheme provided for by the Law of Georgia “On Cumulative Pension,” and
• A person acting on behalf of a voluntary private pension scheme.

The NBG supervises Institutional Investors, and the Law requires them to assess the risks associated with the underlying assets and securitization instruments.

Procedure of Securitization

Securitization, in essence, is a financial arrangement where initial assets are pooled together, and securities are issued based on this pool. The overview of the securitization procedure is provided below:

• Pooling of Assets: Initially, a collection of income-generating financial assets is gathered. These could be anything from loans to other receivables.
• Transfer to Securitization Entities: Instead of the original owner of these initial assets (Initiator) holding onto them, they are transferred to a Securitization Entity set up specifically for this purpose.
• Funding by Issuing Securitization Instruments: The Securitization Entities then finance the acquisition of these initial assets by issuing securitization instruments (e., securities). These instruments are essentially shares in the income generated by the pooled initial assets.
• Payment Backed by Asset Proceeds: The principal and interest payments on these instruments are funded by the income generated by the initial assets.

Securitization converts various income-generating assets into tradable securities. It gives Investors a chance to invest in a diversified portfolio. Meanwhile, it provides the original owner with liquidity.

Under the Law, there are two procedures of securitization:

• Traditional Securitization: This involves transferring ownership of the underlying assets to a Securitization Entity.
• Synthetic Securitization: In this scenario, the credit risk is transferred without transferring ownership of the underlying assets. This can be achieved through methods such as placing a credit derivative or issuing a guarantee. In synthetic securitization, the underlying assets remain with the originator, and credit risk is directly transferred to investors.
• Synthetic Securitization occurs when the Initiator transfers credit risk directly to the Investor(s), without involving a Securitization Entity.

The Securitization Law in Georgia allows Securitization Entities to manage credit risks linked to underlying assets. They do this by issuing securitization instruments. Investors acquire these instruments to generate specific income, contributing to the liquidity and efficiency of Georgia’s financial markets.