[reproduced] structured finance products / structured debt / asset securitization / collateralized debt

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  • / Author: Aaron Lewis
In the asset securitization significance: on the one hand, it makes the illiquid assets into securities through the way to flow; on the other hand, it makes the quality of assets can be separated from the development of pedestrian own credit, and to lower the cost of the scarce capital resources, namely the good assets to obtain high quality capital, it was the realization of the optimal allocation of resources.

At present, a difficult problem in our country economic problem is a lot of bad assets of banking exist, how to deal with these assets as soon as possible for the development of China's economy, the next step towards will produce very big effect. From the development history America of asset securitization, we see not hard, the development of asset securitization is required for solving America savings and loan crisis, the final result is the crisis, asset securitization has also obtained the promotion and development of very good.

In America, securitization has been fully accepted -- through government sponsored enterprises, such as the National Association of federal loans GNMA -- provides two second level mortgage market liquidity. It is more known as Fannie Mae, Freddie Mac and established the first housing loan securitization in 1970, remove them from the bank's balance sheet, while allowing the bank reserves the rights to the service. In short, Fannie Mae buys extending loans to homeowners and mortgage guarantee field. It will be composed of these loans together, pool, and issued by their mortgage-backed securities, that mortgage securities (MBS).

American mortgage securitization, increase the funds available for mortgage loans, or bank lending or credit limit will be limited. The subprime mortgage market to refinance those perceived as high credit risk of loan. These loans make credit constrained owners (many of which are minority low income) for their house loan, to meet the needs of different. This makes more people can afford to buy a house. In early twenty-first Century, USA mortgage reached $9.9, 85% of GDP, of which more than 50% (about $5.3) mortgage securitization.

In the housing mortgage loan securitization, financial institutions began to other financial assets securitization, such as auto loans. In short, a financial institutions to buy auto loans from the financial subsidiary carmaker, and gathered them into a trust products, or any other purpose built entity. This entity -- "special purpose tool SPV", basically is a digital company. He doesn't actually do anything, no one in this work, it is also no specific location. It just has a loan. "Special purpose vehicles" and automobile manufacturers are closely related: if lenders fail, it will not be able to handle the assets. "Special purpose vehicles" investors risk and automobile manufacturers are isolated. In the worst case, "special purpose vehicles" assets is only assigned to the investors hold the securities.

Mortgage debt
Today, in all varieties of loans American potential can be collected and securitization: car rental and lending, credit cards, student loans, equipment loans and leases, aircraft leasing, small business loans, and other types of bank loans. This is just part of the investment banking some creation. The Italians even securitise Football Club television rights income. In one of the most innovative example, singer David Bowie sold $55000000 worth of "Bowie bond", so that investors have the right to a share in the early album royalties on future.


Business strategy

Structure of industrial chain
In the fixed income business, the key to success is to closely understand two types of customers: the issuers and investors is crucial, coordination between them. Successful investment bank understanding customer's investment style. In today's global economy in different regions of the world, investors have different interests. Asian investors are interested in interest income, even if they have to invest for the long term. When Merrill Lynch, HSBC and Citigroup Mexican Oil Company launched a permanent bond trading, they put most of the bonds offered to investors in asia. A wash oil company of these bonds receive bids of about $5000000000, the bond coupon interest rate of 7.75%. The rate of return is interested in Asian investment into the underwriter "target", they bought about 65% of the securities.

Institutional investors
Investment mechanism of mutual funds, pension funds, financial and insurance companies, strategy is different, because they have different needs, especially in view of the characteristics of the changes of securities due date and price fluctuation. In early twenty-first Century, mutual funds have the collateralised debt obligation market investment to prevent the interest rate will bring loss. In this market, portfolio investors can buy to floating rate loans.
Many pension fund regulations prohibit them to invest in high yield bonds. Sponsors accepted the mezzanine securities risk - return status, because they are more attractive than many other asset classes. Financial companies involved in the interlayer bond market tradition. Finally, the insurance company long-term debt to them, buy a low risk of fixed rate long-term assets. For insurance companies, compared with other corporate bonds, asset-backed bonds provide risk return sum situation better, because they are supported by the large number of assets.

Product classification
Investment banks have developed a two grade market for collateralized debt obligations, known as the "debt mortgage bond arbitrage". To distinguish the collateralised debt obligation to escape market and banking market securitization their loans, which is called "balance sheet debt mortgage bond". The latter is usually initiated by commercial banks, hoping to sell assets to release the conventional capital; and arbitrage CDOs is advocated by Asset Management Co. An investment bank would buy loans from the market (bond), rather than directly from the holders of sale purchase. Then these loans placed into a special purpose tool in SPV, and like their securitization, in pursuit of interest. Reducing balance sheet mortgage bond market allows the conventional capital, and arbitrage CDOs provide profit arbitrage.

Fixed income assets of the issuer: banks, insurance companies, enterprises, government agencies


The value creation

In the process of securitization, or more generally, there is a problem in structured finance. These technologies must be determined to create value for customers and investors. If you cannot do this, they will lose the survival of the soil, rather than continue to increase north. However, in academic fields, in theory, who can't create value through structured finance.

Pizza theory
"Do you want it cut into 4 or 8 copies? Are you hungry, he said, would rather cut into 8 pieces." If you find the odd number, you will understand the pizza does not change the size of the whole pizza. Similarly, the way in which the decomposition of debt will not change the original value of the debt. If a company or project is divided into two parts, the cost of capital should be equal to the sum of two parts. If it is not the case, will have the opportunity through the purchase of whole and separate parts sales gain profits, and vice versa. MM argues that, if some spin off some performance good, because the diversification of asset pool and produce more stable cash flow, on the other hand, it has the potential to increase the remaining assets risk.
The validity of this proposition depends on three assumptions: uniform expected, uniform commercial risk, perfect capital market (including equal access to all information). However, these three assumptions do not always satisfied in real. In the real world, the market is not perfect. Business risk with stock becomes more dispersed. Asset securitization can reduce the lender's awareness of prevention, lenders may not really aware of the risks of asset securitization. The most important is not the real world, and when running to meet the first assumption -- even expected. The investment bank will therefore aiming at this point to create value for investors. Through structured financing, investment banks created a new ideal of return / risk assets, these assets for issuers and investors heterogeneous expectations better adjustment.


Pam Deb Leif bonds with the American mortgage bond difference

Germany has long used a mortgage loan securitization form, known as the Pam Deb Leif tool.

Pam Deb Leif bond MBS sheet processing table are usually the same number of dynamic pool issue source sheet servicing the cash collateral cash collateral pool structure of infinite life cycle to usually irreplaceable asset pool of collateral to be replaced as a guarantee

And duration of the pool of assets as collateral to irreplaceable asset pool as a secured loan pool heterogeneous homogeneous credit asset amount depends on the issuing bank and bank depends on the underlying asset quality and value of the mortgage or guarantee, and the credit quality of service mode ordinary type stand and prepaid


Characteristics of assets securitization:

And not just any kind of assets can be used for financing through securitization mode.

The characteristics of the ideal asset:

1) can produce predictable cash flow in the future
2) lower proportion for a certain period of arrears, low default rate, low loss rate of historical records
3) during the life interest repayment allocation in the entire assets
4) assets of the debtor has diversity in geographical distribution and population structure
5) assets can continue to maintain the normal duration; the original owner has been holding the assets for a period of time, have a good credit record (seasoning of asset)
6) related collateral has higher realizable value or has great utility for creditors
7) assets with standardized, high quality guarantee and collection clause

Not suitable for securitization of assets:

1) services are lack of experience or inadequate capital
2) the collateral of the assets in the portfolio is less in quantity, and one of the biggest asset and average assets compared to the high proportion of
3) principal due to a lump sum
4) less payment date
5) asset debtors have the ability to modify the terms of payment

Applicable to asset securitization asset types

1) residential mortgage loans
2) private assets mortgage loans, car sales and various other personal consumption loans
3) commercial real estate mortgage loans, business loans
4) credit card, debit card receivables receivables
5) computer leasing, office equipment leasing, car rental, aircraft leasing lease receivables
6) trade receivables
7) life insurance, health insurance policy
8) airline ticket income, utility fee income
9) oil and gas reserves, mineral resources, forest land
10 kinds of securities portfolio, etc.).

[Asset Securitization: Theory and practice P54]