Chapter 4 - Asset Securitization
Chapter 4 - Asset Securitization
Asset Securitization
Turning Income Streams into New
Investment Vehicles
❖What is Securitization?
❖Asset securitization, the selling of securities
backed by cash flows from a pool of financial
assets
❖Or Securitization is the process of taking an
illiquid asset or group of assets and, through
financial engineering, transforming it (or them)
into a securities.
❖Example of Securitization
Securitization
Structure
❖Benefits of securitization
❖Issuers, investors, and investment bankers all
benefit from asset securitization.
❖Benefit to originator:
• Securitization allows institutions to convert assets that
are not readily marketable into rated securities that
are tradable in the secondary market
• To the extent that the originator continues to service
the underlying assets, a steady stream of servicing
fees is generated.
• Because assets are removed from its balance sheet,
the originator’s exposure to interest rate risk is
reduced. In addition, the credit risk associated with
those assets is passed on to investors.
❖Disadvantages to originator:
• The up-front expenses and effort required for a
first-time securitization are likely to exceed the
expenses and effort associated with a bank
borrowing or other debt offerings
– However, those costs can be amortized over
the life of the transaction.
– In addition, the follow-up transactions can be
completed more easily and with lower
transaction costs.
• Another disadvantage is the required disclosure of
asset data, which the originator may be reluctant to
provide
School of Banking - UEH 13
Investment Bank Dương Tấn Khoa
❖Cost to originator
– Investment-banking fees
– Filing fees, fees to rating agencies, fees
associated with the trustee of the asset pool,
and credit enhancement costs.
❖Benefit to investors
• Securitization helps investors to access assets that
would otherwise not be open to them, e.g., credit card
receivables.
– They are able to gain exposure to real consumer and
corporate assets without having to develop in-house
origination and servicing capabilities.
• Securitization offers investors unique investment
opportunities and attractive risk-return profiles compared
to other asset classes such as government and corporate
bonds.
• For most investors, the benefit comes from portfolio
diversification because correlation between asset classes
is not perfect..
School of Banking - UEH 16
Investment Bank Dương Tấn Khoa
IB