True Sale
A true sale is a transfer of assets that is effective in law as an outright sale, so the assets leave the seller's estate and cannot be claimed by the seller's creditors if it becomes insolvent. It is the foundation of securitisation.
Also called: true sale of assets · legal true sale · true sale opinion · bankruptcy-remote sale
When an originator moves loans or other assets into a special purpose vehicle, investors need to know the transfer would survive the originator's bankruptcy. If a court could treat the deal as a secured loan dressed up as a sale, the assets would fall back into the insolvent estate and investors would rank alongside other creditors. A true sale prevents that.
Courts look at the substance of the deal. The usual factors are whether the seller keeps the risks and rewards of the assets, whether it can take them back at will, whether the price was fair, and whether the buyer can actually deal with what it bought. Lawyers deliver a true sale opinion setting out why, under the governing law, the transfer would be respected. The Basel Committee's securitisation framework requires that transferred exposures be legally isolated from the transferor, beyond the reach of the transferor and its creditors even in bankruptcy, before a bank can treat the risk as transferred, and expects banks to obtain a legal opinion confirming a true sale.
In Islamic finance the same test separates two kinds of sukuk. In asset-backed sukuk, the assets pass to the issuing vehicle in a true sale and investors can look to them. In the far more common asset-based structures, legal title may move but there is no true sale in the insolvency sense, and investors in practice depend on the originator's promise to pay, often through a purchase undertaking.
In practice
Whether a sale is true is decided under the governing law and the law where the assets sit, and tests differ between jurisdictions. A transfer can be a true sale for legal purposes and still stay on the seller's balance sheet under accounting rules.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to True Sale, with more detail and background.
Commonly confused with
| Term | How it differs |
|---|---|
| Secured loan | In a secured loan the borrower keeps ownership and grants the lender a security interest, which ranks in its insolvency. In a true sale ownership passes outright, and the assets leave the seller's insolvent estate. |
See also
- Special Purpose VehicleA special purpose vehicle is a legal entity created for one narrow purpose, such as holding a set of assets or issuing securities, and kept separate from its sponsor so that its assets and liabilities are ring-fenced from the sponsor's.
- Asset-Backed SukukAsset-backed sukuk are sukuk whose underlying assets are transferred to the issuing vehicle in a true sale, so investors own and can look to those assets for repayment, rather than relying only on the originator's promise to pay.
- Purchase UndertakingA purchase undertaking is a unilateral promise, usually by the originator of a sukuk, to buy back the underlying assets from the issuing vehicle at maturity or on default, at a price that typically repays investors' principal and any unpaid profit.
- SukukSukuk are certificates representing undivided ownership interests in assets, usufructs, services or ventures, with returns paid from what those underlying interests generate. "Islamic bond" is useful shorthand but not an accurate legal description.
- Regulatory CapitalRegulatory capital is the minimum capital a licensed financial firm must hold, and keep holding, calculated by a method the regulator prescribes rather than by ordinary accounting. It is a continuing condition of the license, tested at application and at every examination afterwards.