Securitization

Securitization is a funding method transforming relatively illiquid balance sheet exposures into tradable securities placed with investors, with the purpose of raising funds in the markets. Securitization means a transaction in which payments depend upon the performance of the securitized assets and the tranching of the credit risk determines the distribution of losses during the life of the transaction.

A typical example would see a pool of financial assets e.g. car finance loans, home or commercial mortgages, corporate loans, leases, or contractually pledged operating revenues, transferred to a Special Purpose Vehicle (SPV) that then issues debt backed solely by the assets transferred and payments derived from those assets.

Advantages:

• securitization improves the banks liquidity - the originator does not have to wait until it receives payment of the receivables
• more diversified liability structure enables the company to enhance its financial flexibility
• allows obtaining funding from the diversified investor base

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The most important features of the product

• Conversion of usually not tradable exposures into tradable instruments
• Securitization can offer issuers higher credit ratings and lower borrowing costs
• Securitization allows for active credit action and transfer of decreased financing cost (achieved via ABS) to borrowers