Chapter One The Expanding Frontiers of Asset Securitization Dr. Cary Lin.
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Chapter One The Expanding Frontiers of Asset Securitization Dr. Cary Lin
Introduction 『 Securitization 』 What is asset securitization Primary goal of asset securitization Advantages of securitization for issuers Investment attributes of asset-backed securities Concerns raised by securitization
What is Asset Securitization? Asset securitization: the pooling and transformation of homogeneous cash flow producing, illiquid assets, loans and receivables, and issuing credit-enhanced marketable securities (claims) backed by assets --- Asset Backed Security or ABS. In this definition a security is a financing in which the originator is not the investor and a loan is a financing in which the originator is the investor. Securitization separates the originator from the ultimate investor Asset securitization is structured financing: it combines features of traditional lending system and securities system.
Asset-Backed Securities Asset-Backed Securities (ABS) are debt or equity instruments which: Represent interest in a pool of assets sold by originator into SPV Typically secured by homogeneous assets with relatively predictable cash flows Assets are legally separated from the seller/originator, limiting investor exposure to the seller/originator bankruptcy Credit enhancements leading to high credit ratings Structured Finance
Sample of Securitized Assets Residential Mortgage (Mortgage-Backed Securities) Commercial mortgages (CMBS) Non-Mortgages Credit card receivables Auto loans Student loans Trade receivables Heath Care receivables
Special Purpose Vehicles SPV is the operating mechanism of asset securitization – must provide organizational framework for securitization – must isolate the assets from originators – must achieve “ true sale ” of assets – must not engage in business activities that would make it subject of bankruptcy proceeding – to sum up, SPV must be a bankruptcy-remote and bankruptcy proof entity – so, SPV is essentially the linchpin in asset securitization
Goals of Asset Securitization Primary goal: To obtain credit rating for an issuance backed primarily on the quality of the securitized assets and any credit enhancements backing the obligation without regard to originator ’ s own creditworthiness to remove assets from balance sheet (off balance sheet) and then further to boost return on assets and return on equity to channel alternative sources of funding to improve leverage ratio
Originators: Commercial banks Finance companies Special Purpose Vehicle (Special Purpose Trust Special Purpose Company) Credit Enhancer: (Insurance company, Banks, Internal guarantee, Government entity Obligors Investors: loan transfer Credit enhancement securitization Servicer: Commercial banks Finance companies Corporations
Advantages of Securitization for Issuers New and cheaper cost of funding Management of regulatory capital Book fee income up-front in lieu of spread income Management of Interest rate volatility
Advantages of Securitization for other Players Credit Enhancer receives fee for credit enhancement pays only when normal losses are exceed Servicer servicing fee income float income servicing rights can be sold
Advantages of Securitization for other Players (Cont.) Trustee fee income to administer the trust Increased capital market recognition Investor high quality liquid investment ABS provides qualifying investments for institutional investors high credit quality rating stability