COMM 329 Lecture Notes - Lecture 13: Securitization, Special Purpose Entity, Credit Risk
29 Aug 2016
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COMM 329 - Class 13 Prep
Questions for Class on Asset Securitization in Canada
1. How would you define “asset securitization”? What roles does the “special purpose
vehicle” (SPV) associated with the asset securitization play?
Asset securitization is the process of turning packages/pools of illiquid financial assets into
marketable “asset-backed securities”, which are then sold to and held by individual /
institutional investors. Asset securitization occurs through a “Special Purpose Vehicle.”
(SPV.) The assets which are being securitized generate regularly occurring cash flows.
These are the cash flows which funnel through the SPV and make up the expected cash
flows of the security.
The SPV issues securities to raise funds to invest in the securitized assets (i.e. Mortgages,
Credit Card Receivables, etc.) The SPV is effectively a subsidiary designed to facilitate the
asset securitization. The initiating FI effectively establishes a legal relationship to the SPV
where it continues to collect from the customers, leaving that relationship unaffected.
2. What is a “CP conduit”? What is a “single-seller ABS” versus a “multi-seller ABS”?
A ‘Commercial Paper’ Conduit (CP Conduit) is a single-seller/multi-seller securitization that
is financed via commercial paper. The securities which they sell are known as “Asset
Backed Commercial Paper” (ABCP). (These are short-term)
A single-seller ABS results from one source of B/S receivables being sold to the SPV.
You’ve got a lot of A/Rs under one corporate heading.
A multi-seller ABS, as it would sound, results from a SPT which collects receivables from
multiple different sources.
3. What are the kinds of credit enhancements used to protect ABS investors?
1. Reserve Accounts: Collateral is held in the form of cash/short-term securities
2. Lines of Credit: A third-party repayment guarantee is provided for a portion of the ABS
3. Over-Collateralization: The amount of receivables held by the SPV exceeds the value of
the ABSs issued
4. Spread Accounts: The SPV retains some of the proceeds of the ABS issue as further
collateral.
4. How does securitizing some of its balance sheet (B/S) assets help a firm with a low
credit rating gain access to lower-cost, higher-rated credit? **Selling Firm!
By securitizing assets the firm is separating these (low risk) assets from the risks the firm
itself faces [competition, management, etc.] This also allows the investors to more easily
monitor the assets’ on-going credit quality. As such, it can use these assets to raise funds at
a lower cost than it would pay if the firm had raised funds directly, with all of the other
associated risks. The A/Rs effectively get financed by the SPV, who are exposed only to the
credit risk as individuals, as opposed to the cost of capital of the seller. BUT it makes the
rest of business more risky (removes a low-risk asset.) [Except this doesn’t actually
matter!]
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Asset securitization is the process of turning packages/pools of illiquid financial assets into marketable asset-backed securities , which are then sold to and held by individual / institutional investors. Asset securitization occurs through a special purpose vehicle. (spv. ) The assets which are being securitized generate regularly occurring cash flows. These are the cash flows which funnel through the spv and make up the expected cash flows of the security. The spv issues securities to raise funds to invest in the securitized assets (i. e. mortgages, The spv is effectively a subsidiary designed to facilitate the asset securitization. A commercial paper" conduit (cp conduit) is a single-seller/multi-seller securitization that is financed via commercial paper. The securities which they sell are known as asset. A single-seller abs results from one source of b/s receivables being sold to the spv. You"ve got a lot of a/rs under one corporate heading.
