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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




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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


    Car CompanyCar Company

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    Step Two

    In the next step, the Depositor puts the loans into a Master Trust



    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




    MasterTrust SecuritiesSecurities InvestorsInvestors

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    Lets 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 lets say we turn the auto loans into two securities:

    Security A has a balance of $90 millionSecurity B has a balance of $10 million

    Lets 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 & Poors, Moodys 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.

    Lets say theyre 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

    An Example of a SecuritizationA Securitization of Auto LoansConsumers want to buy carsThe car company accumulates a large pool of auto loansThe Steps of Securitization:Step OneStep TwoStep ThreeExample:DiversificationRating Agencies such as Standard & Poors, Moodys and Fitch review the ABS bonds and assign credit ratingsSummary Who Benefits