What is securitisation?
October 25th 2009What is securitisation?
Securitisation is the process of converting a pool of cash flows into tradeable securities known as asset backed securities (ABS) or Mortgage backed securities (MBS).
What is the process involved?
An originator of cash flows (e.g. loans) sells a portfolio of loans to a special-purpose vehicle (SPV). The SPV raises funds to purchase the loans by issuing debt securities to investors.
The interest and principal payments on the underlying loans are used to make the interest and principal payments on the securities.
What are the three key elements involved in securitisation?
- Cash flow
- credit and structural support
- held in a special purpose vehicle (SPV) for the benefit of investors
What are the main benefits of securitisation?
- Asset liability matching
- Cheaper funding for lower rated entities
- Funding diversity
- Regulatory capital relief (for regulated entities)
- Off balance sheet treatment
- Accelerates cash flow
- Risk transfer
What types of assets have been securitised in Australia?
- Residential mortgage loans
- Vehicle and equipment loans and leases
- Credit and charge card receivables
- Trade receivables
- Collateralised loan obligations
- Net interest margins (income streams)
- Commercial mortgage loans and leases
Who typically is involved in the Australian securitisation market?
There are a diverse range of participants including:
- accounting firms
- financial intermediaries
- insurers
- investors
- issuers
- legal firms
- mortgage issuers
- rating agencies
- services providers
- trustees
