FAQ
What is securitisation?
Securitisation is the process of converting a pool of cash flows into tradeable securities known as asset backed securities (ABS) or Mortgage backed securities (MBS).
What is the process involved?
An originator of cash flows (e.g. loans) sells a portfolio of loans to a special-purpose vehicle (SPV). The SPV raises funds to purchase the loans by issuing debt securities to investors.
The interest and principal payments on the underlying loans are used to make the interest and principal payments on the securities.
What are the three key elements involved in securitisation?
- Cash flow
- credit and structural support
- held in a special purpose vehicle (SPV) for the benefit of investors
What are the main benefits of securitisation?
- Asset liability matching
- Cheaper funding for lower rated entities
- Funding diversity
- Regulatory capital relief (for regulated entities)
- Off balance sheet treatment
- Accelerates cash flow
- Risk transfer
What types of assets have been securitised in Australia?
- Residential mortgage loans
- Vehicle and equipment loans and leases
- Credit and charge card receivables
- Trade receivables
- Collateralised loan obligations
- Net interest margins (income streams)
- Commercial mortgage loans and leases
Who typically is involved in the Australian securitisation market?
There are a diverse range of participants including:
- accounting firms
- financial intermediaries
- insurers
- investors
- issuers
- legal firms
- mortgage issuers
- rating agencies
- services providers
- trustees
How has the securitisation market developed in Australia in the last 10 years?
The Australian securitisation market has enjoyed rapid growth over the last 10 to 12 years. The size of the market, based on the value of securities outstanding by Australian securitisation vehicles, has increased from $10billion in March 1995 to over $200billion by the end of 2006.
Why have asset backed securities increased in Australia in the past decade?
Through the growth in the securitisations of residential mortgages. Securitised residential mortgages have increased from $5 billion to $116 billion and currently account for 70 per cent of the assets of Australian securitisation vehicles.
Why have securitised mortgages grown so rapidly?
The changing composition of the mortgage market: the increase of specialist mortgage originators and securitisations becoming an attractive financing option with deal costs decreasing.
What is the prevalence of asset backed bonds domestically and internationally?
Since 2000, more than half the bonds issued domestically by Australian entities have been asset backed bonds, while a quarter of offshore issuance has been of asset backed bonds.
What about Australian securities backed by other types of assets?
Commercial mortgages, trade receivables, other loans and asset backed bonds have also increased in recent years; they have done so at a slower pace and from a much lower level.
What are the common asset types?
- RMBS: residential mortgage loans
- CMBS: commercial mortgage loans
- ABS: Asset backed securities
What are the two types of SPV commonly used in the Australian market?
- Special purpose trusts
- Special purpose companies
When are each created?
Special purpose trust: when assets are transferred to a trustee. The trustee holds the assets pursuant to the terms of a trust deed.
Special purpose companies: solely for the purpose of acquiring and funding securitisable assets.
What is asset-liability matching?
When the securities issued by the SPV are redeemed as and when the underlying cash flows are received. This is most often done through the working of a pass through or pay through provision.
What is the role of the originator?
It is the lender.
What is the originator obliged to do under the terms of securitisation?
In almost all securitisations, the originator is obliged under the terms of the securitisation to administer the securitised asset on behalf of investors. In this capacity, the originator also acts as a servicer.
What's the purpose of cash enhancements?
To insulate investors from losses on the underlying cash flows. Credit enhancement raises the credit quality of a portfolio of assets.
What are the types of credit enhancement?
External: third party makes up losses. Asset level or deal level. Three types:
Lenders Mortgage Insurance (LMI), letter of credit, wrap around guarantee
Internal: subordination, over collateralisation, excess servicing margin
What are some other support facilities?
Liquid facilities: cash available to ensure payments on bonds is timely
Guaranteed investment contracts (GICs): Guarantees a minimum rate of return on any cash the SPV holds.
Swaps: convert earnings on underlying assets to the assets to the same basis as the bonds.
Cross currency swaps: exchanges AUD into other currencies.
What is the role of rating agencies?
Determine how much principal and interest borrowers are likely to repay, to a level of certainly consistent with the particular rating category.
What do rating agencies analyse?
The credit quality of the collateral by looking at:
- Quality of assets
- Features of the pool
- Stress tests of the pool and calculating credit support
- The operational risks
- The structure of the transaction (and the level of liquidity)
- The legal robustness of the documentation.
- Immunity to corporate downgrade
- Re characterisation of income.
