True sale
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The Law and Lore of Repackaging
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“True sale” is an accounting concept relating to the sale of assets by outright title transfer.
Historical purpose: being sure the buyer can keep it
The true sale analysis — carried out by a lawyer, though demanded by an accountant — requires the buyer of an asset to take it “unencumbered”: there must be no contractual restrictions on the buyer’s right to do whatever they like with the asset, just as any legal and beneficial owner would. In particular, the seller should not be able to tell the buyer what it can do with the asset, and should have no right to require its redelivery or future repurchase. (There is nothing really to stop the buyer encumbering the asset in favour of someone else, as long as the seller didn’t require that as a condition of the sale.)
The motivation for this request is simply to support the true sale analysis and avoid “recharacterisation” risk.
This is to ensure that in the seller’s insolvency there is no chance of the seller’s liquidator challenging the transfer of the asset to the purchasing party on the grounds that it was not a true sale for accounting purposes, and recharacterising it as a loan or an unperfected pledge or other form of security which may be treated less favourably in the distribution of insolvency proceeds.
Modern purpose: making sure the seller gets rid of it
In the global financial crisis we saw, of course that the opposite was just as true: it wasn’t the buyer trying desperately to hang on to the diamonds and gemstones bequeathed it by its broker, but to the contrary, the buyer arriving with a pitchfork mob at the broker’s reception demanding to return the dented, rusting cheapest-to-deliver piece of crap you gave it, and instead to have its money back. In particular, mezzanine tranches of CDOs.
A true sale opinion is a “would-level opinion” from a law firm (ideally a magic circle one) confirming that a disposal or title transfer of collateral amounts to a true sale. This may segue into a tedious discussion about the technical legal meaning of the word “equivalent”.