The Securitization Process - New York University
Asset-Backed Securities
The Securitization Process
Prof. Ian Giddy
Stern School of Business New York University
Asset-Backed Securities
q The basic idea q What's needed? q The technique q Applications q Typical sequence
Copyright ?2001 Ian H. Giddy
The Securitization Process3
Securitization of Assets
q Securitization is the transformation of an illiquid asset into a security.
q For example, a group of consumer loans can be transformed into a publically-issued debt security.
q A security is tradable, and therefore more liquid than the underlying loan or receivables. Securitization of assets can lower risk, add liquidity, and improve economic efficiency.
q Sometimes,assets are worth more off the balance sheet than on it.
Copyright ?2001 Ian H. Giddy
The Securitization Process4
What is the Technique for Creating Asset-Backed Securities?
q A lender originates loans, such as to a homeowner or corporation.
q The securitization structure is added. The bank or firm sells or assigns certain assets, such as consumer receivables, to a special purpose vehicle.
q The structure is legally insulated from management
q Credit enhancement and rating agency reviews
q The SPV issues debt, dividing up the benefits (and risks) among investors on a pro-rata basis
Copyright ?2001 Ian H. Giddy
The Securitization Process5
Securitization: The Basic Structure
SPONSORING COMPANY
ACCOUNTS RECEIVABLE
SALE OR ASSIGNMENT
SPECIAL PURPOSE VEHICLE
ACCOUNTS RECEIVABLE
ISSUES ASSET-BACKED CERTIFICATES
Copyright ?2001 Ian H. Giddy
The Securitization Process6
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