mb summer13 -session 7 - securitization

7/27/2019 MB Summer13 -Session 7 - Securitization

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July 23, 2013

Session 7



Session 7 Securitization:

Definition

Types



Definition The process through which

an issuer creates a financial instrument

by combining other financial assets and then marketing different tiers of the repackaged

instruments to investors.

The process can encompass any type of financial asset

and promotes liquidity in the marketplace.



Process of SecuritizationPOOLING ASSETS:

The originator initially owns the assets engaged in the

deal. This is typically a company looking to either raise

capital, restructure debt or otherwise adjust itsfinances.

The option for raising capital include loans, bonds andequity.



Process of SecuritizationPOOLING ASSETS:

A suitably large portfolio of assets is "pooled" andtransferred to a "special purpose vehicle” (the issuer).

Once the assets are transferred to the issuer, there isnormally no recourse to the originator. The issuer is"bankruptcy remote," meaning that if the originator goesinto bankruptcy, the assets of the issuer will not be

distributed to the creditors of the originator. In order to achieve this, the governing documents of the

issuer restrict its activities to only those necessary tocomplete the issuance of securities.



Process of SecuritizationISSUANCE OF UNITS:

To be able to buy the assets from the originator, the

issuer SPV issues tradable securities to fund thepurchase.

The performance of the securities is then directly linked to the performance of the assets.

Credit rating agencies rate the securities which areissued to provide an external perspective on theliabilities being created and help the investor make amore informed decision.



Process of SecuritizationTRANCHING:

Individual securities are often split into tranches, orcategorized into varying degrees of subordination. Eachtranche has a different level of credit protection or riskexposure than another.

The senior classes have first claim on the cash that the SPV receives, and the junior classes only start receivingrepayment after the more senior classes have repaid. This iscalled a cash flow waterfall.



Process of SecuritizationTRANCHING:

In the event that the underlying asset pool becomesinsufficient to make payments on the securities, the loss is

absorbed first by the subordinated tranches, and theupper-level tranches remain unaffected until the lossesexceed the entire amount of the subordinated tranches.

The senior securities are typically AAA rated, signifying alower risk, while the lower-credit quality subordinatedclasses receive a lower credit rating, signifying a higher risk.



Process of SecuritizationSERVICING:

A servicer collects payments and monitors the assets

that are the crux of the structured financial deal. Theservicer can often be the originator, because theservicer needs very similar expertise to the originatorand would want to ensure that loan repayments arepaid to the Special Purpose Vehicle.



Securitization ADVANTAGES:

Reduces funding costs

Reduces asset-liability mismatch Lower capital requirements due to leverage limits

Transfer of risks

Liquidity



Asset Backed Securities (ABS) An asset-backed security is a security whose value and

income payments are derived from and collateralized (or"backed") by a specified pool of underlying assets.

Types: Home equity loans

Auto loans

Credit card receivables Student loans

Others



Mortgage Backed Securities

(MBS) A mortgage-backed security (MBS) is an asset-backed

security that represents a claim on the cashflows from mortgage loans through securitization.



Collateralized Debt

Obligations (CDO) Collateralized debt obligations (CDOs) are a type

of structured asset-backed security (ABS) withmultiple "tranches" that are issued by special purposeentities and collateralized by debt obligationsincluding bonds and loans. Each tranche offers a varying degree of risk and return so as to meet investordemand



End of Session

mb summer13 -session 7 - securitization

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