Securitisation and Associated Risks

Question 1

Explain the structure of ABSs (Asset-Backed Securities)

Answer 1

• More assets were securitised in the 1980s (e.g. credit card receivables, student loans, etc.)
• A portfolio of income-producing assets such as loans is sold by the originating (also ‘sponsoring’ or ‘parent’) banks to a special-purpose vehicle (SPV)
• SPV raised money from private investors through debt
• The cash flows from the assets are then allocated to several ‘tranches’ to meet the credit risk preferences of investors, e.g.:
• Senior Tranche (rated AAA)
• Mezzanine Tranche (rated BBB)
• Equity (or Subordinated) Tranche (unrated)