Securitization is the transformation of an illiquid asset into a security.
Like, consumer loans(credit card debts) can be transformed into a publically issued debt security (like corporate bonds). With credit enhancement in place, asset-backed securities (ABS) have became safe, liquid and high-yielding investments. For industrial, financial and other service sector companies capable of originating and servicing securitizable assets, ABS became a corporate finance alternative as equities, bonds and bank loans.
A lender originates loans, like homeowner or corporation. The bank or firm sells certain assets to the investors. Credit Agency (like Moody's) reviews the company's rating and credit enhancement.The credit agencies will update the rating based on the company inherent risks. Here are the factors agencies examine: - credit risk - liquidity risk - counterparty risk - legal risk - interest risk and currency risk - prepayment risk - cash flow structure
A financial guarantee (bond insurance) is used in ABS to enhance a security to the triple A level, based on the financial guarantee company's triple-A rating. The guarantee is designed to ensure that investors will receive timely payments of principal and interest, regardless of whether the underlying collateral assets are able to support such payments.
Note: Credit enhancement = excess cash flow, third-party guarantees, Letters of credit, cash collateral accounts
AAA = High quality debt instruments, like US Treasury; A = Strong to adequate ability to pay principal and interest; B = Principal speculative; D = Default
Wednesday, December 31, 2008
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The risk of loss in the trading of any securities products can be substantial. The strategies employed here are active trading strategies therefore you should carefully consider whether such trading is suitable for you in light of your personal investment objectives and financial resources. All data and information provided on this site is for informational purposes only. "yourmoneyandyourworld.blogspot.com" makes no representations as to accuracy, completeness, be current, suitability, or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis. The comments and posts here are personal opinions. There are NOT a recommendation to buy or sell any securities or NOT a recommendation for any actions for you in your 401K/IRAs/any retirement accounts/your personal properties. Please consult your advisor, conduct your own research and suitability, and invest at your own risk.
The risk of loss in the trading of any securities products can be substantial. The strategies employed here are active trading strategies therefore you should carefully consider whether such trading is suitable for you in light of your personal investment objectives and financial resources. All data and information provided on this site is for informational purposes only. "yourmoneyandyourworld.blogspot.com" makes no representations as to accuracy, completeness, be current, suitability, or validity of any information on this site and will not be liable for any errors, omissions, or delays in this information or any losses, injuries, or damages arising from its display or use. All information is provided on an as-is basis. The comments and posts here are personal opinions. There are NOT a recommendation to buy or sell any securities or NOT a recommendation for any actions for you in your 401K/IRAs/any retirement accounts/your personal properties. Please consult your advisor, conduct your own research and suitability, and invest at your own risk.
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