Asset Backed Securities

Asset Backed Securities Definition

An asset backed security is a security whose value is backed by the cash flows of a pool of receivables, small and illiquid assets or financial assets that cannot be sold individually. These small and illiquid assets, when pooled together into financial instruments, can be purchased by general investors, thus diversifying the risk of investing in such assets as each security will be a part of the total value of the assets.

The selling of the pool of the underlying assets to general investors is called Securitization. The securitization of asset backed securities is generally handled by a separate institution known as “Special Purposes Vehicle”, which sells the securities and pay the amount to the bank which created the underlying assets. The Special Purposes Vehicle transfers the credit risk of the underlying assets often to an insurance company for which Special Purposes Vehicle has to pay some premium. It is also responsible for distributing the proceeds of the sale of the securities. It also insulates investors from credit risk of loan originator.

When Special Purposes Vehicle transfers the credit risk to another institution like an insurance company, the bank which created the underlying assets (known as originating bank) gets cash when the asset-backed securities are sold to the investors, leading to an improvement in credit rating. If the credit rating is higher, Special Purpose Vehicle and the originating bank can charge more prices for the securities.

Types of Asset Backed Security:

Asset-based Securities are of the following types:

  1. Home Equity Loans: Securities backed by Home Equity Loans are the largest sector in the Asset-backed Securities market.
  2. Auto Loans: Auto loans, the second largest sub-sector in the Asset-based Securities market, are categorized into prime Auto Asset-based Securities, non-prime Auto Asset-based Securities and Sub-prime Auto Asset-based Securities. Prime Auto Asset-based Securities are backed by loans that are given to the people who have good credit history while non-Prime Auto Asset-based Securities are backed by loans given to the people who have an average credit history while Sub-Prime Auto Asset-based Securities are backed by loans given to the people who either have lower income or poor credit history.
  3. Credit Card receivables: Securities collateralized by Credit card receivables were first launched in 1987. Credit Card holders can take loans till a credit limit and they have to pay principal, interest and basic monthly payments. These form the third largest sector in Federal Family Education Loan Program.
  4. Student loans: It is the fourth major sub-sector for asset backed securities market. Student loans are of two types – Federal Family Education Loan Program (FFELP) and Private Student Loans. United States’ department of Education guarantees FFELP loans while Private student loans are taken by students since loans taken through Federal Family Education Loan Program are not sufficient enough because of increasing tuition. In United States, there is Government-sponsored student loan marketing Association which securitizes groups of student loans.
  5. Equipment leases and loans, royalties, aircraft leases and manufactured housing loans are some of the other assets which can be securitized.  

Trading Asset Backed Securities

Asset-based Securities, which are publicly issued, have to fulfill SEC registration and issue financial statements regularly.

Advantages of Asset Backed Securities

Following are the advantages of Asset-based Securities:

  • Asset-based Securities combines those assets which could not be sold individually in their present form.
  • Selling these assets to a separate institution reduces the risks faced by loan originator and allows them to originate more loans.
  • Loan originators earn not only by originating loans but also by servicing assets.

Asset Backed Securities Conference 2011

Asset Backed Securities Main Events
Event Location Dates Sponsor
Global ABS 2011 London June 15-16, 2011 IMN
ABS East 2011 Miami Oct. 3-5, 2011 IMN
Asset Backed Securities Events in US
Event Location Dates Sponsor
Risk Management Forum St. Petersburg, Fla. April 28-30, 2011 ABA
Fixed Income 101 Boston May 3, 2011 FMW
Life Insurance-Linked Investments New York May 10-11, 2011 Marcus Evans
RMBS Washington May 11-12, 2011 Fitch
Sunset Seminar New York May 12, 2011 ASF
Consumer ABS New York May 18-19, 2011 Fitch Training
SiLAS 2011 Miami May 20-21, 2011 Euromoney
Healthcare 2011 New York June 8, 2011 S&P
High Yield Bond Conference New York June 10, 2011 NYSSA
Liquidity Management New York June 14-15, 2011 Marcus Evans
Understanding Securitization & ABS New York June 15, 2011 Fitch Training
Global Distressed Debt Investing Summit New York June 16, 2011 iGlobal Forum
Developing a Corporate Credit Rationale Chicago June 16-18, 2011 S&P
RMBS New York June 22-23, 2011 Fitch
Sunset Seminar New York July 14, 2011 ASF
CRE Finance Council Annual Convention New York June 14-16, 2011 CMSA
Asset-Backed Securities Summit New York June 28-30, 2011 IQPC
RiskSummit 2011 Carlsbad, Calif. July 25-27, 2011 Loan Performance
Sunset Seminar New York Sept. 22, 2011 ASF
Covered Bonds-The Americas Miami Oct. 5, 2011 IMN
Sunset Seminar Charlotte Oct. 20, 2011 ASF
Sunset Seminar New York Nov. 17, 2011 ASF
New Developments in Securitization 2011 New York Dec. 2-3, 2011 PLI
Sunset Seminar New York Dec. 8, 2011 ASF
Asset Backed Securities Events Outside US
Event Location Dates Sponsor
Insurance Linked Securities Summit Europe London April 26-28, 2011 IQPC
ABS 2011 Niagara, Canada June 6-8, 2011 Insight Information
Global Borrowers & Investors Forum 2011 London June 22-23, 2011 Euromoney
South African Capital Markets Summit Cape Town, South Africa Nov. 18-19, 2011 IMN