Chapter 74. Issuer Prospective in Structuring Asset-Backed Securities Transactions
FRANK J. FABOZZI, PhD, CFA, CPA
Professor in the Practice of Finance, Yale School of Management
Independent financial consultant and trainer on securitization, visiting Faculty at Indian Institute of Management, Kolkata, India
Abstract: A securitization differs from these traditional forms of financing in several important ways. The key in a securitization is that the cash flow generated by the asset pool can be employed to support one or more securities that may be of higher credit quality than the company's secured debt or the generic asset pool. The higher credit quality of these securities is achieved by relying on the cash flow created by the pool of assets rather than on the payment promise of the borrowing firm, such cash flows having been isolated in a bankruptcy remote structure and "credit enhanced" using several credit enhancement techniques. Just three of the advantages of securitization compared to nonrecourse and modified recourse are that (1) there is typically lower funding cost when a securitization is used, (2) securitization would mostly likely result in off-balance-sheet funding, thus helping an entity to better its financial statements while keeping effective economic leverage high, and (3) securitization creates securities that are better matched with the cash flow profile of the receivables, thus minimizing asset-liability mismatches. Either acting as agents for an ...