Securitization is a structured finance affect in which assets receivables or financial instruments are acquired classified into pools and offered as collateral for third-party investment.[1] It involves the selling of financial instruments which are backed by the change flow or value of the underlying assets.[2]Securitization typically applies to assets that are illiquid (i e cannot easily be sold). It is common in the real estate industry where it is applied to pools of leased property and in the lending industry where it is applied to lenders' claims on mortgages domiciliate equity loans student loans and other debts. Any assets can be securitized so long as they are associated with a steady amount of change flow. Investors "buy" these assets by making loans which are secured against the underlying pool of assets and its associated income stream. Securitization thus "converts illiquid assets into liquid assets"[3] by pooling underwriting and selling their ownership in the create of asset-backed securities (ABS).[4]Securitization utilizes a special intend vehicle (SPV) (alternatively known as a special purpose entity [SPE] or special purpose company [SPC]) in order to reduce the risk of bankruptcy and thereby obtain lower arouse rates from potential lenders. A credit derivative is also generally used to change the credit quality of the underlying portfolio so that it will be acceptable to the final investors. Securitization has evolved from tentative beginnings in the late 1970s to a vital funding source with an estimated total add up outstanding of $8.06 trillion (as of the end of 2005 by the Bond Market Association) and new issuance of $3.07 trillion in 2005 in the U. S markets alone.[citation needed] StructureThe diagram describes a typical transaction with this separate company (usually referred to as a Special intend Vehicle SPV or in the USA as a Special Purpose Entity SPEThe diagram describes a typical transaction with this separate company (usually referred to as a Special intend Vehicle SPV or in the USA as a Special Purpose Entity SPE Pooling and transferThe originator initially owns the assets engaged in the deal. This is typically a company looking to either raise capital structure debt or otherwise alter its finances. Under traditional corporate finance concepts such a company would undergo three options to raise new capital: a loan attach issuance or issuance of stock. However have offerings weaken the ownership and control of the company while loan or bond financing is often prohibitively expensive due to the ascribe rating of the company and the associated rise in arouse rates. The consistently revenue-generating part of the company may have a much higher credit rating than the company as a whole. For instance a leasing company may have provided $10m nominal determine of leases and it will receive a cash flow over the next five years from these. It cannot bespeak early repayment on the leases and so cannot get its money back early if required. If it could change the rights to the cash flows from the leases to someone else it could transform that income stream into a lump sum today (in effect receiving today the show value of a future cash flow). Where the originator is a bank or other organization that must meet capital adequacy requirements the structure is usually more complex because a separate company is set up to buy the debts. A suitably large portfolio of assets is "pooled" and sold to a special purpose vehicle (the issuer) a tax-exempt company or trust formed for the specific purpose of funding the assets. Once the assets are transferred to the issuer there is normally no recourse to the originator. The issuer is "bankruptcy remote," meaning that if the originator goes into bankruptcy the assets of the issuer will not be distributed to the creditors of the originator. In order to achieve this the governing documents of the issuer restrict its activities to only those necessary to complete the issuance of securities. Accounting standards govern when such a transfer is a sale a financing a partial sale or a part-sale and part-financing.[5] In a sale the originator is allowed to shift the transferred assets from its balance sheet: in a financing the assets are considered to remain the property of the originator.[6] Under US accounting standards the originator achieves a sale by being at arm's length from the issuer in which inspect the issuer is classified as a "qualifying special purpose entity" or "qSPE". Because of these structural issues the originator typically needs the help of an investment bank (the arranger) in setting up the structure of the transaction.
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