ABS: Asset Backed Security
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An Asset Backed Security (ABS) is an attractive alternative investment for corporate debt investors. It refers to a financial security backed by a loan, lease or receivables against any other asset including credit cards and patents. An ABS is issued following the securitization of a pool of various small and illiquid assets that cannot be easily sold off on an individual basis.[br]
An Asset Backed Security (ABS) is an attractive alternative investment for corporate debt investors. It refers to a financial security backed by a loan, lease or receivables against any other asset including credit cards and patents. An ABS is issued following the securitization of a pool of various small and illiquid assets that cannot be easily sold off on an individual basis.[br]
The Process of Issuing an ABS: Asset Backed Security
The process of pooling various assets into financial instruments to be sold off to investors is called securitization. The whole process is handled by a Special Purpose Vehicle (SPV), which is responsible for bundling various assets into a pool that matches the risk preferences of investors wishing to buy securities and for distributing the payments received from securities to the original holders of the assets.
The issuance of an ABS allows an institution to reduce the credit risk of underlying assets by transferring it to an SPV and getting cash in return. The transaction allows the originating institution to use the funds for fresh investments besides resulting in an improved credit rating.
Issuance of an ABS also allows the originating institution to get better value for their assets. This is because the credit rating of an ABS is based only on the assets and liabilities of the SPV and is better than the rating assigned to the originating bank. A better credit rating implies a higher price for the ABS and better returns.[br]
The process of issuing an ABS in the primary market is similar to that of issuance of any other security. The publicly issued securities backed by any asset need to satisfy the standard SEC registration and disclosure requirements, besides having to file periodic financial statements.
An ABS is backed by any asset that has a revenue stream. The most popular ones are backed by home equity loans, auto loans, credit cards and student loans. However, their growing popularity has resulted in the use of any other asset or receivable, including royalties, equipment leases, aircraft leases and intangibles, as collaterals for issuing securities.
