Securitization is defined as a sale of assets to a bankruptcy-remote special purpose entity with a concurrent sale of interests in the entity in the capital markets. The most basic objective of a securitization is to separate the credit risk of the originator of assets from the credit risk inherent with the assets. The bankruptcy-remote special entities are called special purpose entities (SPEs) or special purpose vehicles (SPVs). The interests in such entities that are sold in the capital markets are known as asset-backed securities (ABS). Securitization began in the 1970s when government agencies issued securities backed by home mortgages. Later, commercial mortgages, credit card receivables, auto loans, student loans, and many other financial (and, later, nonfinancial) assets were securitized. While securitization itself is just a few decades old, its roots lie in an age-old practice of collateralized borrowing.
Securitization is focused on legal isolation of assets and is a legal technique at its core. However, we will not address legal or tax aspects of securitization in this chapter. Instead, we will focus on the structuring and analytical aspects of transactions, as well as market history and trends. In a number of cases, we will rely on numerical examples to illustrate key concepts. We will use simplified examples with a deliberate goal of forging broad intuitive understanding of securitization. ...