Securitization
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Securitization is a financial technique that pools assets together and, in effect, turns them into a tradeable security. Financial institutions and businesses of all kinds use securitization to immediately realize the value of a cash-producing asset. Securitization has evolved from its beginnings in the 1970s to a total aggregate outstanding (as of the second quarter of 2003) estimated to be $6.6 trillion. This technique comes under the umbrella of structured finance.
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Asset backed security
Main article: asset backed security
ABS are bonds backed by a pool of financial assets that cannot easily be traded in their existing form. By pooling together a large portfolio of these illiquid assets they can be converted into instruments that may be offered and sold more freely in the capital markets.
In a basic securitization structure, the originator creates a pool of financial assets, such as mortgage loans, and then sells these assets to a specially created investment vehicle that issues bonds backed by those financial assets. These are asset-backed securities.
When investors hold a conventional bond they get a regular interest payment during the life of the bond, plus repayment of the full face value of the bond (the principal) at the end of its life. So long as the issuing company is financially healthy it will continue to make these payments, which means that the risk of default is directly linked to the company's solvency.
In a securitization these payments depend primarily on the cash flows generated by the assets in the underlying pool. This protects ABS investors from losing their money if the company that originated the financial assets goes bankrupt.
As a result, ABS allows companies to issue bonds that achieve a higher credit rating -- typically triple-A -- than they could achieve with conventional bonds. In other words, ABS allows companies to borrow money at cheaper rates.
While residential mortgages were the first financial assets to be securitized, non-mortgage related securitizations have grown to include many other types of financial assets, such as credit card payments, trade receivables, auto loans and student loans. The royalty payments on David Bowie's back catalogue have even been used as securitizable assets.
Adapted from the US Securities and Exchange Commission's definition of ABS as incorporated in its proposed ABS rules (http://www.sec.gov/rules/proposed.shtml), published in the Federal Register on May 13 2004 and as promulgated in final form as Regulation AB published in the Federal Register on January 7, 2005
Size
The ABS market is fairly young and has rapidly become an important part of the US capital markets. One source estimates that US public ABS issuance grew from $46.8 billion in 1990 to $416 billion in 2003. Another source estimates 2003 new issuance closer to $800 billion.
Government securitization
Germany
Debt issue: In June 2004 the German government issued €5.436 billion worth of fixed- and floating-rate credit-linked notes through a newly formed Special Purpose Entity domiciled in the Federal Republic of Germany. The notes are linked to obligations of the Russian Federation that were issued through the so called "Paris Club" throughout the 1980s.
- Arranged by: Deutsche Bank, Goldman Sachs London
- Details: Cbonds (http://www.cbonds.info/world/eng/news/index.phtml/params/id/30794) S&P (http://www2.standardandpoors.com/spf/pdf/fixedincome/062404_ariesSNAP.pdf)
Hong Kong
Equity issue: In December 2004 the Hong Kong Housing Authority issued a Real Estate Investment Trust with government-owned shopping centers and parking lots valued at $2.8 - $4.5 billion. Southeast Asia's biggest property owner by assets, CapitaLand Ltd. has agreed to buy $180 million of the offering. That will transfer management of the properties on to them. The issue, called "The Link REIT", was oversubscribed 28 times with real estate assets of US$3.3 billion and orders of almost $80 billion.
See also
- Asset Backed Security
- Collateralized Bond Obligation
- Collateralized Debt Obligation
- Fannie Mae
- Mortgage Backed Security
- Pooled investment
- Privatization
- Securitized bond
- Structured finance
- Thomson Financial league tables
External links
- Securitization.Net (http://www.securitization.net/)
- Acrys Consult's documentation about technological aspects of ABS transactions (http://www.acrys.com/en/ac_documentation_securization.htm)
- R&R Consulting, Sylvain Raynes and Ann Rutledge, principals; authors, The Analysis of Structured Securities (Oxford Univ. Press) (http://www.creditspectrum.com/)nl:Securitisatie