Securitization Market
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The global securitization market is dominated by credit card backed securities, auto backed securities, home equity backed securities and collateralized debt obligations. However, in recent years, several new market segments, including securities backed by student loans, equipment leases, manufactured housing, small business loans and aircraft leases, have come up.[br]
The global demand for bonds backed by securitized loans was very weak in 2008 and 2009 in the wake of the credit crunch precipitated by the mortgage and financial crisis of 2007-2009. The US government took several initiatives, including the introduction of the Term Asset Backed Securities Loan Facility (TALF) in November 2008, to boost the securitization market.
Purpose of the Securitization Market
Well functioning and efficient securitization markets are key to financial growth and greater economic stability. Securitization involves the pooling of various types of assets and using them as collateral to issue securities. The process allows the originator of assets access to greater funding for fresh investments. The market allows a company, a bank or any other institution to raise funds, restructure debt or adjust finances by passing some of the risk from their balance sheet.
Constituents of the Securitization Market[br]
The securitization market involves the originator or the owner of the assets, a Special Purpose Vehicle (SPV) created for carrying out the process, an asset manager who manages the assets of an SPV, a legal advisor who advises on the structure of bonds to be issued and the investors who buy the securities.
The originator of assets sells or transfers assets to an SPV, which then uses the assets purchased as collateral to issue securitiess to investors. The cash flows from the underlying assets are used to pay off the interest and the principal to the holders of the securities. The performance of these securities is totally dependant on the assets backing them. These securities can be issued on a fixed rate or floating rate basis and are generally rated by reputed rating agencies on the basis of the risk they carry. Asset backed securities are often split into tranches with each tranche representing a different level of risk and return.
