Re-Characterization Risk and True Sale Principle within the Context of Asset Securitization

Abstract The aim of this paper is to determine the re-characterization risk inherent in a classic securitization project. The paper highlights the importance of making a more thorough investigation of the true-sale doctrine providing principal tools for minimization of such a risk. The author examines the legal consequences of re-characterization for a securitization project and outlines the basic factors which may lead to re-characterization. He explores the classic true-sale doctrine and suggests its better understanding within the securitization context. The existing literature provides no common approach which would help to distinguish between a sale and a secured loan in this context. This article fills a gap in the doctrine by establishing an efficient ‘purpose-oriented approach’, under which a court shall focus on the purpose of the principal transaction in securitization. We suggest the exhaustive list of criteria for characterization of such a deal which should include only adequacy of consideration paid for the receivables and adequacy of the subject-matter of the deal.