ASSET BACKED

SECURITIES

DISHA GUPTA
57
What is asset backed securities?
 Asset-backed securities (ABS) are securities like bonds that pay periodic interest until
maturity, when the principal is paid back. The income from ABSs is derived from pools of
loans and receivables that have been securitized into ABSs.

 The pool of assets is typically a group of small and illiquid assets that are unable to be sold
individually. Pooling the assets into financial instruments allows them to be sold to
general investors and allows the risk of investing in the underlying assets to be diversified.

 The pools of underlying assets can include common payments from credit cards, auto
loans, and mortgage loans e.t.c.

 A special purpose trust or instrument is set up which takes title to the assets and the cash
flows are "passed through" to the investors in the form of an asset-backed security.
 TYPES
 Home equity loans

 Auto loans

 Credit card receivables

 Student loans
 Trading asset backed securities
 In the United States, the process for issuing asset-backed securities in the primary market
is similar to that of issuing other securities, such as corporate bonds

 It is governed by the Securities Act of 1933, and the Securities Exchange Act of 1934, as
amended.

 Publicly issued asset-backed securities have to satisfy standard SEC registration and
disclosure requirements, and have to file periodic financial statements

 The Process of trading asset-backed securities in the secondary market is also similar to
that of trading corporate bonds.

 Most of the trading is done in over-the-counter markets, with telephone quotes on a

security basis.
 WORKING
•Financial institutions that originate loans—including banks, credit card providers,
auto finance companies and consumer finance companies—turn their loans into
marketable securities through a process known as securitization.

•These financial institutions sell pools of loans to a special-purpose vehicle (SPV),

whose sole function is to buy such assets in order to securitize them.

• The SPV, which is usually a corporation, then sells them to a trust.

•The trust repackages the loans as interest-bearing securities and actually issues
them. The “true sale” of the loans by the sponsor to the SPV provides “bankruptcy
remoteness,” insulating the trust from the sponsor.

•The securities, which are sold to investors by the investment banks that underwrite
them, are “credit-enhanced” with one or more forms of extra protection—whether
internal, external or both.
 Why should one invest in this?
 These are one of the types of investment securities and they are backed by assets. These
investment options do have the benefit of pooling together combinations of securities
which may not be found individually.

 Asset backed securities are the best choice for a number of investors because of the assets
which are backing these investments. The risk of a complete loss of capital is much lower
because the assets used to back the security can be used to offset any capital losses due to
defaults.

 Asset backed securities allow the original lending entity to recover the funds that were
loaned out, so that new loans can be made with this funding.

 Another benefit is that the balance sheet ratios and the liquidity are improved. The
funding structure of these securities offer more flexibility as well.

 The originators earn fees from originating the loans, as well as from servicing the assets
throughout their life.
THANK YOU