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Asset Securitization: Theory and Practice by JOSEPH C. HU

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Chapter 12

Asset-Backed Securities

As mentioned in the introductory chapter, asset-backed securities, in a narrower sense, include securities backed by non-residential and non-commercial-mortgage assets, such as credit card receivables and automobile loans.1 These securities started to grow rapidly in the late 1980s. This chapter will describe two most important types of ABS: credit card receivable-backed securities (credit card ABS) and auto loan-backed securities (auto ABS). In many ways, the cash-flow structure and credit enhancement of other ABS resemble either those of the credit card or auto ABS. To avoid repetition, this chapter will discuss only the two important ABS.

For credit card ABS, this chapter will first describe the underlying collateral, the different types of issuers, and unique transaction parameters. Then, it will present an example of a typical transaction to illustrate the transaction parameters, the cash-flow pattern of credit card receivables, and the specific credit-enhancement mechanism. For auto ABS, this chapter will also discuss the major types of issuers, the cash flow of auto loans, and the unique features of credit enhancement. The prepayment aspect of auto loan ABS, which is different from that of RMBS, will also be discussed. The final section will present the performance of credit ratings and relative value of the two ABS.

The Growth of the ABS Market

In the 1970s and 1980s, when asset securitization was primarily for residential mortgages, ...

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