Existing assets
Historically, in almost all markets the first securitisation transactions that have taken place have been securitisations of pools of existing assets - i.e. assets which are in existence at the outset of the transaction - examples of this type of transactions would be securitisations of an existing pool of mortgages or car loans. In these transactions, as the original portfolio pays down so do the securities issued in the securitisation.

Transactions involving substitutions
As corporate treasurers and arrangers sought to amortise up-front costs over a longer transaction period, the concept of transactions involving substitution of assets was introduced.

Under transactions with this feature, principal receipts on the original securitised portfolio are reinvested at regular intervals in the purchase of further (then existing) assets from the originator for an initial revolving (or substitution) period; it is only upon expiry or earlier termination of the revolving period that principal receipts on the portfolio are paid through to the holders of the relevant asset-backed securities in amortisation of those securities.

Under this type of transaction, subsequent sales of assets to the SPV after the initial closing generally only occur if the originator both has further appropriate assets at the relevant time to sell into the transaction and chooses to do so. In addition, principal receipts on the existing underlying receivables are replaced by the purchase of an equal principal amount of new receivables so that the transaction always maintains its "asset-backed" status.

Accordingly, although these transactions involve sales of assets into the transaction after the initial closing, they are little more than transactions involving a series of sales of, then existing, assets into the transaction. As such, they would not generally be classified as future flow securitisation. Many trade receivable securitisations, particularly where the average life of the receivables in question is short or where the end-finance is being provided through a CP conduct, adopt this technique.

Credit card securitisations - a hybrid
Credit card securitisations are a step nearer future flow securitisations. Under a typical credit card securitisation, existing and future receivables arising under particular identified credit card account are sold to a trust which issues trust certificates to investors. As and when future receivables arise under the identified accounts, they are immediately and automatically sold to the trust without further action on the part of the originator. As such, therefore, when the documentation is signed at the outset of the transaction, it does anticipate an automatic future sale of a receivable that arises in the future (albeit under a credit card account which is identified at the outset, or in certain cases subsequently). However, the securities issued are still truly asset-backed securities due to the fact that by virtue of the fluctuating nature of the certificate holders' interest in the trust, the certificates held by the investors are always backed by a principal amount of receivables at least equal to the principal amount of the investor certificates.

True future flow securitisations
Under these types of transactions, the originator is able to monetise the value of its expected future sales/productions. Generally in these types of transactions there is not necessarily the same tight US$1 for US$1 correlation between the outstanding principal amount of the securities and the outstanding principal amount of the underlying receivables - hence future flow securitisations are arguably not always 100 per cent. "asset-backed" securities. They are perhaps best looked at under the heading of structured finance transactions.

The term future flow securitisations is generally used to describe a securitisation carried out by an originator in an emerging market country where the originator has significant foreign currency export (or associated) revenues owed to it by creditworthy obligors located outside the emerging market country in question. The technique - which has been used extensively to date in Latin America - enables the originator to raise funding on the basis of its expected future export receivables, and to raise finance in circumstances where such funds would very probably not otherwise be available to it.

In the rest of this article, the term "future flow securitisations" is used to mean this last category of securitisation transaction.

Future flow securitisation - a typical structure
A typical future flow securitisation transaction will involve a structure along the following lines:

• an originator located in an emerging market country (home country) has significant foreign currency export (or associated) receivables owed to it by creditworthy obligors located in countries outside the home country in question; the receivables are denominated in a hard currency, typically U.S. dollars;
• the originator wishes to raise funds on the back of its anticipated future export receivables;
• the originator establishes an SPV (either a trust or SPC) in a tax neutral jurisdiction outside the originator's home country;
• the originator sells to the SPV its existing and future export receivables in return for an upfront purchase price; the originator continues to service the receivables; (N.B. In certain transactions, the originator, rather than selling the receivables to the SPV, pledges the receivables to the SPV as security for a loan from the SPV to the originator);
• in some transactions, the originator retains a measure of ongoing liability in respect of the receivables - e.g. to repurchase the receivables from the SPV in certain specified circumstances - in other transactions there is no such residual originator liability;
• the SPV funds the purchase price by issuing securities backed by its right to receive the existing and future export receivables;
• the obligors of the export receivables are notified of the sale of the receivables to the SPV and undertake to make payment of the receivables to bank accounts of the SPV outside the originator's home country;
• during an initial revolving period, as the obligors make payment in respect of the receivables, the funds are used by the SPV to meet scheduled interest (and any scheduled principal) payment obligations on the securities and associated expenses; the remaining cash flow is paid back to the originator;
• upon the expiry of the initial revolving period, or if earlier upon the occurrence of specified early amortisation events, all cash flow received by the SPV from the export receivables is used to pay interest and principal on the securities until the securities have been redeemed in full.

Future flow securitisations - why are they used?
The attraction of future flow securitisations is that they can enable an originator located in an emerging market country which has a foreign currency debt rating (i.e. the rating accorded to the external foreign currency debt of the home country) which is either below investment grade or of a low investment grade, to structure a transaction which enables the originator to issue securities and obtain funding in the international capital markets with a rating that is higher than the foreign currency debt rating of the originator's home country. The general rule is that foreign debt issued by a company cannot be rated above the external foreign currency debt rating of the company's home country - this is known as the "sovereign ceiling". However, a properly structured future flow securitisation can enable an originator to access the international capital markets with a rating above the foreign currency debt rating of its home country - thus bettering the originator's access to the international capital markets. This is known as getting above the sovereign ceiling.

Future flow securitisations - essential characteristics of the underlying receivables
The essential characteristics of the types of receivables that can be used to support a future flow securitisation are as follows:

• the receivables must be denominated in a hard currency (generally US dollars) which is not the currency of the originator's home country;
• the receivables must be owed to the originator by creditworthy (generally investment-grade rated) obligors located in (generally industrialised) countries outside the originator's home country; and
• the receivables must permit payment outside the originator's home country.

Examples
The types of receivables that have been used to date in future flow securitisations are as follows:

• US dollar receivables owed to an emerging market telecoms company by international long distance telecom carriers in respect of international long distance telephone calls (Pakistan Telecom);
• US dollar receivables owed to an Asia airline by credit card companies in respect of credit card purchases of airline tickets (Philippine Airlines);
• US dollar receivables owed to an emerging market exporter in respect of the export and sale to buyers located outside the exporter's home country of a variety of products/items - e.g. oil, petroleum products, timber, pulp paper (APP), steel etc;
• US dollar receivables owed to an Asian bank (Bank Internasional Indonesia) by international credit card companies in respect of settlement of credit card transactions in local currency in the originator's home country on behalf of the credit card companies; and
• US dollar receivables owed to a bank originator in an emerging market country by a bank obligor outside the originator's home country in respect of remittance payments made by the originator in local currency in its home country on behalf of the overseas bank obligor.

Questions: In what way do future-flow securitizations differ from existing-asset securitizations? What kinds of companies, in what kinds of countries, are most likely to employ this technique?