The Role of Investment Banks
in the Securitization Process
Evolution of Securitization
What is Securitization?
A financial process which allows one asset to be
grouped with others to create a marketable security
guaranteed by the cash flows.
Securitization Process
Process by which individual assets that are
difficult to trade on their own are aggregated into
securities that can be traded in financial markets.
First the asset is created.
An investment bank sets up a trust.
The trust owns the assets being securitized.
Usually each trust is related to a single pool of
assets.
The trust will purchase the pool of assets from the
firm that created them
Securitization Process
The trust will raise money by selling asset backed
securities.
The owners of the securities receive the income
generated by the trust.
The diversity of assets underlying an asset backed
security provides safety to investors.
Borrowing Under the Traditional
Borrower/Lender Relationship
Borrowing Under a Securitization Structure
Key Elements to Securitization Process
key elements to a typical securitization include the following:
Issuer - A bankruptcy-remote special purpose entity (SPE) formed to
facilitate a securitization and to issue securities to investors.
Lender - An entity that underwrites and funds loans that are
eventually sold to the SPE for inclusion in the securitization.
Lenders are compensated by cash for the loan and by fees.
In some cases, the lender might contract with mortgage brokers.
Lenders can be banks or non-banks.
Mortgage Broker - Acts as a facilitator between a borrower and the
lender. The mortgage broker receives fee income upon the loan's
closing.
Key Elements to Securitization Process (continued)
Servicer
The entity responsible for collecting loan payments from borrowers
and for remitting these payments to the issuer for distribution to the
investors.
The servicer is typically compensated with fees based on the volume
of loans serviced.
The servicer is generally obligated to maximize the payments from
the borrowers to the issuer, and is responsible for handling
delinquent loans and foreclosures.
Investors - The purchasers of the various securities issued by a
securitization. Investors provide funding for the loans and assume
varying degrees of credit risk, based on the terms of the securities
they purchase.
Rating Agency - Assigns initial ratings to the various securities
issued by the issuer and updates these ratings based on subsequent
performance and perceived risk.
Key Elements to Securitization Process (continued)
Trustee - A third party appointed to represent the
investors' interests in a securitization. The trustee
ensures that the securitization operates as set forth
in the securitization documents
Underwriter - Administers the issuance of the
securities to investors.
Asset-Backed Securities from the
Investment Banker Perspective
Asset Backed Securities
Underwriter’s Role
Investment bankers would work with the issuer to:
prepare and format performance data to meet rating agency
requirements
arrange and participate in initial meetings between the issuer
and the surety providers
prepare comprehensive presentation materials for the surety
providers
arrange and participate in initial meetings between the issuer
and the rating agencies
prepare comprehensive rating agency presentation materials
perform the cash flow analysis
Asset Backed Securities
Underwriter’s Role (continued)
Investment bankers would work with the issuer to:
negotiate credit enhancement and bond structure
requirements
work with counsel to draft the transaction and offering
documents
coordinate a targeted investor road show to market the
transaction
prepare investor road show presentation materials
manage the marketing and syndication of the transaction
assist the issuer with preparation of the investor reporting
materials including a dedicated ABS website
