Introduction to Securitization
July 2008, ©2008
Securitization is a financial technique that pools assets together and, in effect, turns them into a tradable security. The end result of a securitization transaction is that a corporation can obtain proceeds by selling assets and not borrowing funds. In real life, many securitization structures are quite complex and enigmatic for practitioners, investors, and finance students. Typically, books detailing this topic are either too lengthy, too technical, or too superficial in their presentation. Introduction to Securitization is the first to offer essential information on this topic at a fundamental, yet comprehensive level-providing readers with a working understanding of what has become one of today's most important areas of finance.
Authors Frank Fabozzi and Vinod Kothari, internationally recognized experts in the field, clearly define securitization, contrast it with corporate finance, and explain its advantages. They carefully illustrate the structuring of asset-backed securities (ABS) transactions, including agency mortgage-backed securities (MBS) deals and nonagency deals, and show the use of credit enhancements and interest rate derivatives in such transactions. They review the collateral classes in ABS, such as retail loans, credit cards, and future flows, and discuss ongoing funding vehicles such as asset-backed commercial paper conduits and other structured vehicles. And they explain the different types of collateralized debt obligations (CDOs) and structured credit, detailing their structuring and analysis. To complement the discussion, an introduction to credit derivatives is also provided.
The authors conclude with a close look at securitization's impact on the financial markets and the economy, with a review of the now well-documented problems of the securitization of one asset class: subprime mortgages. While questions about the contribution of securitization have been tainted by the subprime mortgage crisis, it remains an important process for corporations, municipalities, and government entities seeking funding. The significance of this financial innovation is that it has been an important form of raising capital for corporations and government entities throughout the world, as well as a vehicle for risk management. Introduction to Securitization offers practitioners and students a simple and comprehensive entry into the interesting world of securitization and structured credit.
About the Authors.
Part One. Background.
Chapter 1. Introduction.
Chapter 2. Issuer Motivation for Securitizing Assets and the Goals of Structuring.
Part Two. Structuring ABS Transactions.
Chapter 3. Structuring Agency MBS Deals.
Chapter 4. Structuring Nonagency Deals.
Chapter 5. Credit Enhancements.
Chapter 6. Use of Interest rate Derivatives in Securitization Transactions.
Chapter 7. Operational Issues in Securitization.
Part Three. Review of ABS Collateral.
Chapter 8. Collateral Classes in ABS: Retail Loans.
Chapter 9. Asset-Backed Commercial Paper Conduits and Other Structured Vehicles.
Chapter 10. Securitization of Future Cash Flows:Future Revenues, Operating Revenues, and Insurance Profits.
Part Four. Collateralized Debt Obligations.
Chapter 11. Introduction to Collateralized Debt Obligations.
Chapter 12. Types of Collateralized Debt Obligations.
Chapter 13. Structuring and Analysis of CDOs.
Part Five. Implications for Financial Markets.
Chapter 14. Benefits of Securitization to Financial Markets and Economies.
Chapter 15. Concerns with Securitization’s Impact on Financial Markets and Economies.
Appendix A. Basics of Credit Derivatives.
Appendix B. Valuing Mortgage-Backed and Asset-Backed Securities.
Frank J. Fabozzi, PhD, CFA, CPA, is Professor in the Practice of Finance at Yale University's School of Management, Editor of the Journal of Portfolio Management, and Associate Editor of the Journal of Structured Finance and the Journal of Fixed Income.
Vinod Kothari, chartered accountant, is an author, trainer, and consultant on securitization, asset-based finance, credit derivatives, and derivatives accounting. Kothari is a visiting faculty member at the Indian Institute of Management, where he teaches structured finance.