FL10 – Securitisation 4/12/15 Prof. Michael Shillig
SECURITISATION
INTRODUCTION
HOW TO REDUCE CREDIT RISK
o Share among many (week 5 & 6)
Loan syndication
Bond issue
o Get security (week 7 and 8)
o Transfer to others – securitisation (week 10)
o Hedge – derivatives (week 9)
o Monitoring/influencing borrower behaviour – covenants (week 5)
o Better ranking than other – subordination (week 5)
Overview
o What is asset securitisation
Asset backed securities
Collateralised debt obligations
o Policy considerations
WHAT IS SECURITISATION
Definition = Illiquid loan obligations (residential and commercial
mortgages, credit card receivables, commercial loans) are pooled and
repackaged as highly liquid and tradable debt securities supported by the
underlying loan portfolio
Purpose
o Risky loans are removed from the originator’s balance sheet
o Reduced regulatory capital requirements
Since you are replacing illiquid loan obligations with risk free
cash
o Debt securities that are then issued by SPVs are more highly rated
Since SPV is not the originator, but is a bankruptcy remote
vehicle higher rating cost of capital reduced
o Lower cost of capital due to bankruptcy remoteness
o Credit risk associated with any particular debt obligation is spread
out to investors in debt securities that are being generated
o Structured finance – tranches with optimum risk attributes
o Capital can be raised more widely – can attract investors that you
might not have been able to attract
Certain investors can only invest in higher rated entities
Originate and distribute model
o Originator has granted loans to B1 and B2 of 1000 each
o Assume each loan carries a 10% risk of total default, thus expected
value of each total = 900
o However, risk averse buyers would pay much less because payment
is uncertain hence would demand a large discount (they would
not buy loan for 900)
o For that reason, the originator would do the following:
Sell both B1 and B2 loans to SPV
The loans are combined in a single pool
This transfer from originator to SPV has to be a true sale –
originator must have no interest in the SPV i.e. no link
between originator and SPV
SECURITISATION
INTRODUCTION
HOW TO REDUCE CREDIT RISK
o Share among many (week 5 & 6)
Loan syndication
Bond issue
o Get security (week 7 and 8)
o Transfer to others – securitisation (week 10)
o Hedge – derivatives (week 9)
o Monitoring/influencing borrower behaviour – covenants (week 5)
o Better ranking than other – subordination (week 5)
Overview
o What is asset securitisation
Asset backed securities
Collateralised debt obligations
o Policy considerations
WHAT IS SECURITISATION
Definition = Illiquid loan obligations (residential and commercial
mortgages, credit card receivables, commercial loans) are pooled and
repackaged as highly liquid and tradable debt securities supported by the
underlying loan portfolio
Purpose
o Risky loans are removed from the originator’s balance sheet
o Reduced regulatory capital requirements
Since you are replacing illiquid loan obligations with risk free
cash
o Debt securities that are then issued by SPVs are more highly rated
Since SPV is not the originator, but is a bankruptcy remote
vehicle higher rating cost of capital reduced
o Lower cost of capital due to bankruptcy remoteness
o Credit risk associated with any particular debt obligation is spread
out to investors in debt securities that are being generated
o Structured finance – tranches with optimum risk attributes
o Capital can be raised more widely – can attract investors that you
might not have been able to attract
Certain investors can only invest in higher rated entities
Originate and distribute model
o Originator has granted loans to B1 and B2 of 1000 each
o Assume each loan carries a 10% risk of total default, thus expected
value of each total = 900
o However, risk averse buyers would pay much less because payment
is uncertain hence would demand a large discount (they would
not buy loan for 900)
o For that reason, the originator would do the following:
Sell both B1 and B2 loans to SPV
The loans are combined in a single pool
This transfer from originator to SPV has to be a true sale –
originator must have no interest in the SPV i.e. no link
between originator and SPV
