25 years: Securitisation
In this video, Francesco provides us with some background on what securitisation is and also introduces us to the problem that securitisation is trying to solve, explaining why issuers and investors might enter into a securitisation arrangement, and finally, how it actually works in practice.
In this video, Francesco provides us with some background on what securitisation is and also introduces us to the problem that securitisation is trying to solve, explaining why issuers and investors might enter into a securitisation arrangement, and finally, how it actually works in practice.
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16 mins 7 secs
Securitisation is the process of creating a security, in the form of either a bond or a loan, that gives the owner the right to receive some cash, in a form that is tradeable (in a form that allows someone to sell it or acquire it).
Key learning objectives:
Define securitisation
Understand the basic mechanics of securitisation
Define SPVs and outline how they facilitate operations
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Securitisation is defined under EU Regulation 2017/2401 and 2402.
Today, securitisation is widely used by: Regulated financial institutions, Alternative lenders, Asset managers (CLO managers), Private Equity and hedge funds, Corporates, Government and government agencies.
Of the non-retained European deals, CLOs dominated the market in 2020, with $22bn equivalent). This was followed by Auto loans ($17.6bn equivalent) and then RMBS. RMBS was further split into prime RMBS, non-conforming RMBS and buy to let, at $10.7bn, $6.5nn and $6.15bn respectively.
Special Purpose Vehicles - These are orphan companies that are established exclusively to manage one or more transactions. The company will have directors, and will employ some third-party servicers to service the receivables. Also, SPVs are bankruptcy remote.
On day one, this SPV buys the rights to receive the contractual payments on the underlying pool of assets. The SPV then collects the payments as they come in, typically via a third-party so-called servicer. They accumulate the cash flows and on a monthly or quarterly basis, they distribute cash flows to the investors, or noteholders according to the interest and repayment profile of the bonds.
Additional counterparties involved are the SPV’s banks, which will open bank accounts and manage payments. There are often other 3rd parties such as calculation agents or cash managers, who do the calculations, or a backup servicer. The structure also envisages the appointment of a trustee (or agent bank) that will represent the rights of noteholders.
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