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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.


Securitisation is

1. the issue of securities,
--usually bonds,
--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.


Securitisation offers:

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
--issuing “normal”
--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). 

--are collateralised
--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, 
bonds and
--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.


Credit-linked note

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.


Format of the asset-backed securities

The borrowings are normally made in a multi-tranche format, such as the CDO structure discussed below, with credit ratings or credit default protection obtained
for (at least) the major tranches. The tranches will be repaid in order of rating, with the actual timing of amortisation / repayment dependent on the underlying assets, early repayments on them and any default losses and recoveries.
The securitised assets are sometimes classified according to whether they are amortising or non-amortising.
Excess remaining collateralisation may be returned to the original asset owner or kept by the bond holder. Conversely, arrangements may be put into place to cover any shortfalls in the payments to the holders of the ABS. For example, the payments may be guaranteed by a third party. The details of all such arrangements will all be set out in the legal documentation governing the issue of the ABS and the prospectus published when the ABS are first issued.
Thus, CLOs, CBOs and CDOs could involve combining the credit risks of different instruments into a portfolio which is then divided and repackaged as several new securities. In other words, a range of different bank loans and bonds is pooled into a single portfolio of securitised assets, which is then used to back several different tranches of ABS.
The new (asset-backed) securities are backed by the portfolio of bonds, and the cashflows from the portfolio are divided up into tranches and assigned to the different new securities created. The new securities are designed to have different credit risk features, by construction.
This is so that they will appeal to a range of investors, who have different preferences with regard to risk and return. By structuring the bond tranches in the way that best meets the various requirements of the different potential investors, it may be possible to reduce the overall cost of borrowing.