True Sale
Definition
The legal characterization of an asset transfer in securitization as a definitive sale rather than a secured loan. True sale is essential for bankruptcy remoteness—if the originator files bankruptcy, the transferred assets belong to the SPV and are not part of the bankruptcy estate available to originator's creditors. Achieving true sale requires transfer of risks, benefits, and control to the purchasing entity.
Why it matters
True sale determines whether securitization achieves bankruptcy remoteness. If transfer is recharacterized as secured financing, originator bankruptcy pulls assets back into estate, destroying the securitization structure and potentially causing investor losses. This risk is why rating agencies scrutinize true sale opinions and why originators use special-purpose entities with strict limitations. Understanding true sale requirements explains many seemingly arcane securitization structures—non-consolidation opinions, independent directors, separateness covenants—all exist to preserve true sale characterization.
Technical details
True sale requirements
Courts examine multiple factors to determine true sale vs. secured financing: (1) Transfer of risk—buyer bears loss risk from defaults. (2) Transfer of benefits—buyer receives all cash flows. (3) Transfer of control—seller cannot modify or retake assets. (4) Arm's length pricing—purchase price reflects fair value. (5) Accounting treatment—seller treats as sale (off balance sheet). (6) Intent—parties intended true sale. (7) No recourse—buyer cannot force seller to repurchase (exceptions: reps and warranties breaches). No single factor is determinative. Courts weigh totality of circumstances. Securitizations include legal opinions concluding transfer should be treated as true sale.
Bankruptcy remoteness and SPVs
True sale transfers assets to Special Purpose Vehicle (SPV) designed to be bankruptcy-remote. SPV limitations: (1) Restricted purpose—can only hold assets and issue securities. (2) No debt—cannot incur other obligations. (3) Separateness requirements—separate books, accounts, employees. (4) Independent directors—at least one director with duty to prevent voluntary bankruptcy. (5) Non-consolidation opinion—legal opinion SPV won't be consolidated with originator in bankruptcy. These limitations ensure SPV won't file bankruptcy and originator bankruptcy won't reach SPV assets. The goal: create true orphan structure where assets are legally separated from originator's creditors.
Representations and warranties vs. true sale
True sale can coexist with limited recourse for breach of reps and warranties. Originator represents loans meet certain criteria (credit score >620, LTV <80%, verified income). If loans breach reps and originator must repurchase, this is NOT recourse that defeats true sale—it's enforcement of original sale terms. However, broad repurchase obligations or guarantees can undermine true sale. Example: if originator must repurchase any defaulting loan, buyer hasn't truly assumed credit risk—looks like secured financing. Balance: narrow reps for fraud/misrepresentation (preserves true sale) vs. broad performance guarantees (destroys true sale).