Securitization Asset

 

 

 

Securitization is a form of structured finance that enables a company to pool together various types of assets and use them as collateral to issue securities. The process of securitization provides the issuer access to additional funding for fresh investments. The process also allows the holder of assets to package its illiquid or less liquid assets into a pool and transfer them to a separate entity which uses them as collateral to issue securities or bonds. All assets can be securitized as long as they represent a stream of cash flows.[br]

 

Asset securitization was initiated in the 1970s with the structured financing of mortgage pools and was aimed at boosting the capital availability of banks and in turn meeting the growing credit demand of the public. The process of securitization was successfully applied in the case of automobile loans in 1985 and, subsequently, to credit card receivables and student loans. In recent years, equipment leases and patents have also been securitized.

 

Securitization Asset: Purpose and Process

Securitization is a method of financing one’s receivables and thus sharing the risk associated with them. Instead of an outright sale of assets, securitization calls for pooling together of various types of assets under an independent company or trust which then issues some type of securities backed by the pool of assets. The investors in these securities thus share the risk and the reward associated with the underlying pool of assets. The performance of the issued securities is totally dependant on the assets backing them. The credit rating on these securities represents the risk and returns offered by them. Asset backed securities or securities backed by mortgages or any other types of receivables are often split into tranches with each tranche representing a varying degree of risk and return.[br]

 

Asset securitization is undertaken by a company planning to raise funds, restructure its finances or balance sheet. Traditional funding options, such as the issuance of equity, dilute ownership and debt is quite costly. Securitization allows a company to use its illiquid assets or receivables to raise funds. The process not only frees up the capital tied up in these assets but also allows the company to sell them at a higher price. Credit enhancement of an asset takes place when it is transferred to a new entity having no other assets, thus entitling it for a higher credit rating.