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Page 1: An Example of a Securitization - University of Belgrade · An Example of a Securitization ASF Securitization Institute 360 Madison Avenue New York, NY 10017-7111 Telephone: (646)

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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

Page 2: An Example of a Securitization - University of Belgrade · An Example of a Securitization ASF Securitization Institute 360 Madison Avenue New York, NY 10017-7111 Telephone: (646)

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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


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