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What are asset-backed securities (ABSs)?

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An asset-backed security (ABS) is a marketable security that is issued by a special purpose vehicle (SPV) that buys financial receivables, such as automotive leases and consumer loans, that serve as collateral (backing) for and to generate the interest and principal payments to service the issued securities.

A mortgage-backed security (MBS) is a securitized debt obligation that represents a claim to the cash flows from mortgage loans, most commonly on residential property, that are grouped together into a single pool that serves as collateral (backing) for the securities.  A mortgage-backed security is type of asset-backed security backed (secured) by mortgage loans, instead of other types of financial assets that are not real estate mortgages (e.g., loan, lease and credit card receivables).

With a pass-through security, the payments of interest and principal received by the SPV on the pooled assets are passed to the investors in equal measure in the same period received, net of service fees, where every investor has equal rights over the cash flows from the assets.  The pooled assets serve both as collateral and to generate the cash flows used to make regular interest payments and the repayment of principal to the investors.

The risks of an ABS, including credit, interest-rate and prepayment risks, are directly connected with the asset pool and the structuring of the securities. The pooled assets are the only assets of the SPV and, as nonrecourse financing, the debtors in respect of the underlying assets in an ABS – not the asset originator – are held responsible for the assets and the performance of the securities.

The major stages in the ABS structuring process are:

  1. Establishment of a bankruptcy-remote third-party securitization vehicle (SPV), normally by the asset originator;
  2. The true sale of the assets to the SPV on a nonrecourse basis;
  3. Pooling the purchased assets and, if a CDO, structuring the tranches;
  4. Credit enhancement from the originator and a third party to improve the credit rating and marketability of the security; and
  5. Creation and sale of the securities backed by the pooled assets held by the SPV to investors.
Securitization of Automotive Leases
This illustrates the securitization of automotive leases, where special units of beneficial interest (SUBI) are transferred by the titling trust to an SPV and then transferred in a true sale to another SPV in exchange for the ABSs that are sold by an issuing entity to investors in a public offering, with the sale proceeds of the ABS being used to purchase the SUBI certificates.

Source:

This illustrates the securitization of automotive leases, where special units of beneficial interest (SUBI) are transferred by the titling trust to an SPV and then transferred in a true sale to another SPV in exchange for the ABSs that are sold by an issuing entity to investors in a public offering, with the sale proceeds of the ABS being used to purchase the SUBI certificates.

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