Introduction to Securitization

COLLATERAL CLASSES: BASIS OF CLASSIFICATION

Existing Assets and Future Flows

From the viewpoint of whether the asset pool will comprise of existing cash flows, or expected cash flows, we make a broad distinction between existing assets and future assets.

In an existing asset securitization, the cash flow from the asset exists and there is an existing claim to value. In a future flow securitization, there is no existing claim or contractual right to a cash flow; such contractual rights will be created in the future. For example, an airline company securitizing its future ticket receivables is a case of a future flow securitization, since it is based on expected cash flows. On the other hand, in case of securitization of loan receivables, we have an existing contractual claim on the cash flows—so, it is an existing asset.

The distinction between existing assets and future flows is relevant from several viewpoints:

1. In future flows, as the cash flows are to be originated in future, there is a performance risk on the originator. Sometimes, this performance risk may be mitigated by guarantee by a third party. For instance, in the case of construction of infrastructure facilities, it is quite common for some state agency to provide a guaranteed return. In either case, if the originator fails to perform, or the guarantor fails to pay the guaranteed sum, there would be no cash flows to pay the investors. Hence, future flows transactions cannot be independent of the originator. This ...