Securitization

A comprehensive process in relation to converting of an asset into the corresponding securities that are marketable. Stated differently, they are those securities that have the asset backed in terms of value. The assets that are primarily used for backing the asset up are enumerated below however the list is not exhaustive.

1.      Credit card receivables

2.      Consumer Loans

3.      Loans in relation to Autos that is auto loans

4.      Commercial Assets

Remember the terminology, when the assets are backed up by those assets as mentioned above the securities would be referred to as the Asset back securities. Now we would brief about the parties that are part of this process of Securitization.

Seller

It is primarily a company that used to serve the customers through loans and thus has standing receivables. It sell these customer loans, stated differently the receivables to the issuer. The responsibility in relation to the collection of the loans’ principal amount as well as interest that has accrued upon the loan rests with the Seller.

Issuer

The issuer is the 2^nd party in relation to the process of securitization and it is charged with the pooling of the all the loans that have been acquired and then create financial instruments which are subsequently issued to the investors in the established form of marketable securities referred to as the Asset backed securities.

Investor

The investor is the 3^rd party in relation to the process of securitization is the buyer of marketable securities referred to as the Asset backed securities.

The appealing point about the Asset backed securities is that they offer the flexibility in terms of risk as well as returns on the investment owing to the fact that there is diversification in relation to the structuring, quantum of yield and the eventual maturity of the potential instrument of investment.

Securitization is one of the Financing Mode

Assume that there is financial institution which is engaged in the provision of the auto loans as a primary operational activity. In order for the business to flourish, it is quite imperative that there are sufficient quantum of the funds available with the business to provide for the rising demand of the auto loans which may be subsequently used for financing the acquisition or purchase of the automobiles.

The indicators of the market are speculating about the potential deficit in relation to the auto loans after a couple of years. This speculation amounts to the threat which functions as a threat and catalyzes the demand in relation to the auto loans. The financial institution decides in favor of securitization which is backed and supported by the non-mortgaged assets of the subject company. A specific portion of the auto loans was sold. The result of the process is that the cash flows are significantly improved by the monetary figure of $150,000 which can be put to use in relation to meeting the increasing market demand of the auto loans. 

Benefits of the Securitization to the Issuer

The important benefits that are afforded by the process of securitization to the issuer are enumerated as follows:

   1.      Cut down the borrowing costs

   2.      Balances out the Assets and the Liabilities

   3.      Release back the Regulatory Capital

   4.      Source of Profits

   5.      Mitigating the Risk and transferring it