Introduction to Securitization

KEY POINTS OF THE CHAPTER

• Securitization is a form of structured finance.

• The common theme to all types of structured finance transactions is that the transaction is structured to modify or redistribute the risk of the collateral among different classes of investors by the use of a structure.

• Securitization involves the pooling of assets/receivables and the issuance of securities by a special purpose vehicle.

• The end result of a securitization transaction is that a corporation can obtain proceeds by selling assets and not borrowing funds.

• The asset securitization process transforms a pool of assets into one or more securities referred to as asset-backed securities.

• A securitization differs from traditional forms of financing in 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.

• Three advantages of securitization compared to nonrecourse and modified recourse factoring are that (1) there is a typically lower funding cost when a securitization is used; (2) receivables that factors will not purchase may be acceptable for a securitization; and (3) proceeds from the sale in a securitization are received immediately while the firm may or may not obtain a cash advance from the factor.

• Securitization is primarily concerned with monetizing financial assets in such a way that the risks of the collateral (credit risk, interest rate risk, prepayment risk, and ...