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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
A Securitization of Auto Loans
Consumers want to buy cars
When consumers buy their car, they get an auto loan. They get a loan from a car company.
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.
The Steps of Securitization:Step One In the first step, the car company sells the auto
loans to a depositor
Car CompanyCar Company
In the next step, the Depositor puts the loans into a Master Trust
Master TrustMaster Trust
The Master Trust then issues securities from time to time, which are then sold to investors by the underwriter
MasterTrust SecuritiesSecurities InvestorsInvestors
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.
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.
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.
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)
The investors determine the interest rate coupon paid on the bonds
The collective payments made by consumers on the auto loans supplies the cash to pay the bond coupon to investors
The car company gets cash, investors earn a return and get ongoing reports about the performance of the loans
The car company takes the cash and makes new loans to help sell more cars
Securitization has been a very important source of funding for us Bibiana Boerio, CFO, Ford Credit, Financial Times, September 25, 2002
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 portfoliosAn 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