Asset securitization process and steps

Asset securitization process and steps

Asset securitization refers to packaging assets that can generate future cash flows to build an asset pool, and increasing credit through structured methods to turn them into into securities that can be issued and circulated in financial markets. The following is the asset securitization process and steps I have compiled. Welcome for your reference!

In summary, the basic process of a complete securitization (what is asset securitization) financing Yes: The sponsor sells the securitized assets to a special purpose vehicle (Special Purpose Vehicle, SPV), or the SPV actively purchases securitizable assets, and then the SPV pools these assets into an asset pool (Assets Pool), and then uses the The cash flow generated by the asset pool supports the financing of the issuance of securities in the financial market, and finally the cash flow generated by the asset pool is used to pay off the securities issued. It is divided into the following nine steps:

1. The originator (loan-issuing financial institution) determines the basic assets and establishes an asset pool

The original equity owner of the assets qualifies and analyzes their own assets. Quantitative analysis: divest and combine existing assets that are less liquid but can bring stable cash flow, such as accounts receivable, housing mortgage loans, etc., or contracts or projects that can bring stable cash flow in the future, and form an asset pool.

2. Establish a special trust institution SPV

An SPV is an independent legal entity specially formed for asset securitization. It is the core entity of structural reorganization. The original concept of SPV comes from the risk isolation design of China Wall, which is mainly designed to achieve the purpose of "bankruptcy isolation". It can be a legal entity, a shell company, or an intermediary with national credit.

3. Transfer ownership of securitized assets to SPV

This step will involve many legal, tax and accounting issues. It should be noted that the original equity holder of the asset must sell the asset to the SPV in a true sale. By establishing a risk isolation mechanism, a firewall is built between the asset and the issuer, that is, other creditors of the originator are required to initiate the sale. When a person goes bankrupt, he or she has no recourse to the underlying assets and achieves bankruptcy isolation.

4. Credit enhancement

In order to attract investors and reduce financing costs, asset securitization products must be credit enhanced to improve the credit rating of the securities issued. Credit enhancement can be divided into two categories: internal credit enhancement and external credit enhancement. There are many specific methods. For example, internal credit enhancement methods include: dividing the senior/subordinate structure (senior/subordinate structure) and establishing interest spread accounts. (spread account), opening a letter of credit, over-collateralization, etc. External credit enhancement is mainly achieved through guarantees.

5. Credit rating

The higher the credit rating, the lower the risk of the security, thereby making the cost of issuing securities to raise funds lower. A considerable number of asset securitization operations will use two rating agencies to rate securities to enhance investors' credit.

6. Selling securities

The SPV hands over credit-rated asset-backed securities to securities underwriters for underwriting, and the underwriters promote the issuance of securities to help the securities be successfully issued. In addition, during the securities design stage, investment banks as underwriters generally play the role of financing consultants, using their experience and skills to form a financing plan that can protect the interests of the sponsor to the greatest extent and is acceptable to investors.

7. Pay the asset purchase price to the sponsor

The securities firm sells the securities to investors and hands the proceeds to the SPV. The SPV receives cash proceeds from the issuance from the securities underwriters, and then pays the sponsor the price to purchase the underlying assets. At this time, priority should be given to paying relevant fees to the professional institutions hired.

8. Manage asset pool

SPV also needs to manage and dispose of the asset pool and recover the cash flow generated by the assets. The manager can be the original equity holder of the asset, that is, the promoter, or it can be a specially hired experienced asset management institution. In the operation of credit asset securitization, the manager is mainly responsible for collecting the debtor's scheduled repayment of principal and interest and supervising its performance of debts. In the operation of real estate securitization, the manager is mainly responsible for obtaining income through leasing or selling real estate.

9. Repayment of securities

The SPV will entrust the trustee to repay principal and interest to investors on time and in full. Interest is usually paid periodically, while the date and sequence of principal repayment vary depending on the underlying asset and the repayment schedule of the security issued. After the asset-backed securities mature, according to the agreement when the securities are issued, if there is any surplus, it will be distributed between the sponsor and the SPV according to the agreement, and the entire asset securitization process will be completed.

It should be noted that the above only describes the most general or standardized process for asset securitization operations, but in countries or regions with different socio-economic environments, each operation will be different. Therefore, when designing and operating a specific securitization process, the existing socio-economic environment should be the basis.

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