KBRA releases research examining how participation interest structures differ from traditional ABS structures, in which the special-purpose vehicle (SPV) holds direct legal title, as well as the incremental risks that can emerge under stress and the legal and structural protections that can mitigate those risks.

In ABS sectors with high asset counts, such as small business financings and consumer loans, transferring legal title to the underlying assets can be costly, administratively complex, or operationally disruptive. Participation interest structures offer an alternative, allowing a securitization to acquire the economic rights and proceeds associated with the assets while legal title remains with the originator, sponsor, partner bank, or other entity.

As the use of participation interests grows in certain ABS sectors, particularly when a partner bank is used, the distinction between economic ownership and legal title warrants greater attention. While participation and directly titled structures may produce identical cash flows during normal conditions, their legal protections can differ significantly during a period of stress. Notably, a titleholder bankruptcy or insolvency in a participation interest structure can test the securitization’s rights to asset cash flows, its control over collections, and its ability to enforce against the underlying assets.

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KBRA, one of the major credit rating agencies, is registered in the U.S., EU, and the UK. KBRA is recognized as a Qualified Rating Agency in Taiwan, and is also a Designated Rating Organization for structured finance ratings in Canada. As a full-service credit rating agency, investors can use KBRA ratings for regulatory capital purposes in multiple jurisdictions.

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