Flashcards in securitisation Deck (8):
Asset-backed securities result from
1. securitisation of
--a revenue generating asset
--held by the borrower.
2. typically take the form of bonds.
1. the issue of securities,
--where the bonds are
2. serviced and repaid
--out of a defined element
--of future cashflow
--owned by the issuer.
a securitisation typically involves:
1. pooling together of a group of assets,
2. combined with
--issue of one or more
--tranches of asset-backed securities.
3. cashflows generated by pooled assets are --used to
--service interest and capital payments
--on the asset-backed securities.
4. assets pooled together are often
--not very marketable.
5. Securitisation therefore converts
--a bundle of assets
--into a structured financial instrument
--which is then negotiable.
1 way for a company to raise money,
-- linked directly to cashflow receipts
--that it anticipates receiving in the future
2 an alternative source of finance to
--secured or unsecured bonds.
3. bond-holders have no recourse
--to any other cashflow or assets of the issuer.
4. often structured so
--creditors of the original company
--have no claim on cashflows
--generated by securitised assets.
securitised assets includes classes such as:
1 residential and commercial mortgage-backed securities (MBS).
--payments are secured or collateralised
--on the interest and capital
--made under mortgages used to buy property.
2 credit card receivables (CCABS).
--on payments made by credit card holders
--to the credit card company.
3 collateralised loan, bond and debt obligations (CLO, CBO and CDOs).
--typically collateralised on
--existing bank loans,
--a mixture of both bank loans and bonds respectively.
4. insurance securitisations
--where financial security created
--backed by receivables
--arising from an insurance book
Structure of securitisation arrangement
The basic structure of a securitisation arrangement is illustrated in Figure 4.1 above. Company X sells the secured assets that will generate the future income stream to the special purpose vehicle (SPV), which in turns raises the required funds to purchase them by issuing (asset-backed) bonds to investors. The cashflow stream generated by the secured assets is then paid to the SPV, which in turn uses them to meet the interest and capital payments on the asset-backed bonds.
A credit-linked note (CLN) can be used by the holder of corporate bonds to transfer the credit risk on those bonds to other investors. This is done by setting up an SPV, which then sells CLNs to investors and uses the proceeds to buy risk-free Government bonds. At the same time, the SPV also sells a credit default swap, based on the original corporate bonds to the original bondholder.