[PDF] [PDF] An Example of a Securitization

[PDF] An Example of a Securitization

When consumers buy their car, they get an auto loan They get a loan from a car company The car company wants to sell its loans The car company finds an underwriter to help structure the securitization and find investors in the securities which will be issued

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Securitization of Assets ❑ Securitization is the transformation of an illiquid asset into a security ❑ For example, a group of consumer loans can be transformed 

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For example, the most senior and least risky tranche receives investment returns generated by the collateral pool ahead of other tranches and is last to incur losses 

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So how about some examples? In commercial mortgage-backed securities ( CMBS), and potentially other asset classes, it is common that upon delinquency or 

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Asset securitization is where a financial institution or other business that owns assets places those assets in a structure so that the risk and rewards of owning 

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The type of assets underlying a structure does not determine whether a securitization exposure exists For example, a full flow-through structure backed by 

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The creation of collateralized mortgage backed securities is one example The process increases the number of possible investors due to the ability to sell shares 

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for example, has first call on the income generated by the underlying assets, while the riskiest has last claim on that income The conventional securitization 

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For example, in case mortgage loans are the assets used for securitisation, the monthly repayments are receivables 11 In the event of insolvency/bankruptcy of  

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An Example of a

Securitization

ASF Securitization Institute

360 Madison Avenue

New York, NY 10017-7111

Telephone: (646) 637-9200

Fax: (646) 637-9126

1

A Securitization of Auto Loans

Consumer

Issuer

Investor

2

Consumers want to buy cars

• When consumers buy their car, they get an auto loan.

They get a loan from a car company.

3

The car company accumulates a

large pool of auto loans • The car company wants to sell its loans. It wants to sell them for the best price possible.

The best price comes from a securitization.

• The car company finds an underwriter to help structure the securitization and find investors in the securities which will be issued. 4

The Steps of Securitization:

Step One• In the first step, the car company sells the auto loans to a depositor

Depositor

Depositor

Car Company

Car Company

5 Step Two• In the next step, the Depositor puts the loans into a Master Trust Loans Loans

Depositor

Depositor

Master Trust

Master Trust

6 Step Three• The Master Trust then issues securities from time to time, which are then sold to investors by the underwriter

Depositor

DepositorLoans

Loans

Master

Trust

Master

TrustSecurities

SecuritiesInvestors

Investors

7 Example:• Let's say we have 10,000 auto loans with a balance of $100 million. If we just held on to the auto loans we would take a loss every time there was a loss on an auto loan. But let's say we turn the auto loans into two securities:

Security A has a balance of $90 million

Security B has a balance of $10 million

• Let's say that we then allocate any losses on the auto loans to B first. This way, Security A is less risky than Security B. 8

Diversification

• In addition, having auto loans from different parts of the country, in different amounts, and on different types of cars creates a diversified pool of auto loans, which decreases the amount of risk, making it more attractive to investors. 9

Rating Agencies such as Standard & Poor's,

Moody's and Fitch review the ABS bonds and

assign credit ratings• Rating agencies evaluate the collateral, in this case the auto loans, and model the transaction, setting up levels which will result in a rating for the A Securities. • Let's say they're rated "BBB" (investment grade). • Then they probably are eligible for investment by investors such as pension plans. 10 • These ABS bonds are marketed and sold to investors in the public and private markets through investment banks with detailed disclosure about the collateral (the car loans) 11 • The investors determine the interest rate "coupon" paid on the bonds 12 • The collective payments made by consumers on the auto loans supplies the cash to pay the bond coupon to investors 13 • The car company gets cash, investors earn a return and get ongoing reports about the performance of the loans 14 • The car company takes the cash and makes new loans to help sell more cars 15 • "Securitization has been a very important source of funding for us..." Bibiana Boerio,

CFO, Ford Credit, Financial Times

, September

25, 2002

16 Summary - Who Benefits• Who benefits from a securitization? • The Consumers benefit: - They get a lower rate, because as the amount of credit increases, interest rates go down • The Car Company benefits: - They have a ready market for their auto loans • The Investors benefit - They are able to invest in high quality debt securities and increase the diversification of their portfoliosquotesdbs_dbs17.pdfusesText_23