Introduction to Securitization

KEY POINTS OF THE CHAPTER

• The main reasons that corporations use securitization are (1) the potential for reducing funding costs; (2) the ability to diversify funding sources; (3) the ability to manage corporate risk; (4) for financial entities that must satisfy risk-based capital requirements, potential relief from capital requirements; (5) the opportunity to achieve off-balance financing; and (6) the opportunity to generate fee income.

• The key to a corporation issuing bonds via a securitization with a higher credit rating than the corporation’s own credit rating is the SPV because that entity legally separates the assets used as collateral for the securitization from the corporation that is seeking financing (the originator/seller).

• The SPV is structured as a bankruptcy-remote entity, thus insulating the transaction from the credit risk of the originator/seller.

• The risk of losses in an asset pool used in a securitization transaction can be mitigated by proper credit enhancements to a point where a target rating can be achieved.

• Even after factoring in the cost of credit enhancement and other legal and accounting expenses associated with a securitization transaction, capital seeking firms have found securitization to be less expensive than issuing corporate bonds.

• By establishing itself in the securitization market, a corporation can look at both the corporate bond market and the asset-backed securities market to determine its best funding source.

• Securitization ...