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An Example of a Securitization
ASF Securitization Institute
360 Madison AvenueNew York, NY 10017-7111Telephone: (646) 637-9200Fax: (646) 637-9126
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A Securitization of Auto Loans
Consumer
Issuer
Investor
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Consumers want to buy cars
• When consumers buy their car, they get an auto loan. They get a loan from a car company.
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The car company accumulates a large pool of auto loans
• The car company wants to sell its loans. It wants to sell them for the best price possible. The best price comes from a securitization.
• The car company finds an underwriter to help structure the securitization and find investors in the securities which will be issued.
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The Steps of Securitization:Step One• In the first step, the car company sells the auto
loans to a depositor
DepositorDepositor
Car CompanyCar Company
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Step Two
• In the next step, the Depositor puts the loans into a Master Trust
LoansLoans
DepositorDepositor
Master TrustMaster Trust
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Step Three
• The Master Trust then issues securities from time to time, which are then sold to investors by the underwriter
DepositorDepositor
LoansLoans
MasterTrust
MasterTrust SecuritiesSecurities InvestorsInvestors
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Example:
• Let’s say we have 10,000 auto loans with a balance of $100 million. If we just held on to the auto loans we would take a loss every time there was a loss on an auto loan. But let’s say we turn the auto loans into two securities:
Security A has a balance of $90 millionSecurity B has a balance of $10 million
• Let’s say that we then allocate any losses on the auto loans to B first. This way, Security A is less risky than Security B.
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Diversification• In addition, having auto loans from different parts of
the country, in different amounts, and on different types of cars creates a diversified pool of auto loans, which decreases the amount of risk, making it more attractive to investors.
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Rating Agencies such as Standard & Poor’s, Moody’s and Fitch review the ABS bonds and assign credit ratings
• Rating agencies evaluate the collateral, in this case the auto loans, and model the transaction, setting up levels which will result in a rating for the A Securities.
• Let’s say they’re rated “BBB” (investment grade).
• Then they probably are eligible for investment by investors such as pension plans.
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• These ABS bonds are marketed and sold to investors in the public and private markets through investment banks with detailed disclosure about the collateral (the car loans)
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• The investors determine the interest rate “coupon” paid on the bonds
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• The collective payments made by consumers on the auto loans supplies the cash to pay the bond coupon to investors
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• The car company gets cash, investors earn a return and get ongoing reports about the performance of the loans
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• The car company takes the cash and makes new loans to help sell more cars
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• “Securitization has been a very important source of funding for us…” Bibiana Boerio, CFO, Ford Credit, Financial Times, September 25, 2002
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Summary – Who Benefits• Who benefits from a securitization?
• The Consumers benefit:– They get a lower rate, because as the amount
of credit increases, interest rates go down
• The Car Company benefits:– They have a ready market for their auto loans
• The Investors benefit– They are able to invest in high quality debt
securities and increase the diversification of their portfolios