4 Reasons why Investors would go for debt securitization

Debt securitization is a process of structured finance that can distribute the risk of gathering too many assets in a single pool.

This often involves selling off assets to a special purpose organization and then utilizing the proceeds in issuing new securities which are backed by the assets. These debt securities are sold to investors who share the risk and reward from these investors. All assets that can predict stable cash flows can be securitized. Debt securitization is a process of debt help that will help the lender securitize the debt and use the money in issuing different assets. As you securitize your debt, you can considerably invest money and gain in long term period of time. Read on to the reasons why a loan originator would go for debt securitization. 1. It serves as an alternative to funding: On the part of the originator of such loans, debt securitization provides a good alternative to funding. An asset backed security that stands can stand on its own good rating and thus provides the originator with a genuine incremental funding that will appreciate with time. The existing creditors of the originators will invest in the asset backed securities and in exchange of this; he will provide the originator with new lines of credit. By debt securitization, it is also possible to acquire a good credit rating for the asset backed security. 2. Management of balance sheet: As you free up the capital of the originator, there is a fundamental benefit of a true sale. In response to this securitization, the balance sheet becomes compressed and robust. As you add on new assets to the balance sheet, you can easily restore the reduction in leverage on the sale post securitization. A matched funding for balance sheet assets can also be achieved by debt securitization. 3. Risk allocation: The credit risk in the portfolio of the investors will be re- allocated and transferred to the ABS investors and also helps to minimize the credit risk that the originator is exposed to. This is a very useful benefit of debt securitization as the originator will be able to be largely exposed to the individual borrowers and provide a high amount of comfort to the creditors. 4. Efficiency of operating process: The portfolio analysis and the risk reallocation that takes place during the time of debt securitization leads to re-examination and rechecking of the operating process that is working within the originator organization. In many cases, specialists handle such components as funding, business management, administration and risk management. This promotes the efficiency of the operating process. Besides the benefits that debt securitization provides to its originators, it also provides a huge amount of incentive offers to the originators. Thus, if youre interested in seeking debt help

by debt securitization, keep in mind the benefits of securitizing your debt and promoting the business operations of an originator company. Various examples :

Securitisation of an intangible asset Securitisation of a Risk Securitisation of a Portfolio of Securities Securitisation of a movable asset Tracker Securitisation of a Building Securitisation of an Activity Cat Bonds Securitisation of author/composer copyrights 4 Reasons why investors would go for debt securitization

A lot of the current financial crisis has been attributed to the securitization of debt. This means that debt that is ordinarily illiquid has been converted into a trade-able security and then sold off in the open markets. In order to sell a security; there should always be an underlying asset that generates income or cash flows. That is the reason why such securities are also known as Asset Backed Securities (ABS). Securitizing debts has several benefits and this concept has been around from the 70s. It is only recently that things started to go wrong and that was primarily because the underlying risk was not understood properly.
How does it work?

Suppose there is a bank which has given out mortgages worth a $100 million. Ordinarily, the bank cant resell these mortgages. That is because there is no market for individual mortgages. However, the banks can convert these mortgages into tranches of debt and securitize them. So that means the banks will create tranches of debt according to the risk that they carry and then sell them off in the markets. These tranches will carry credit ratings to show how risky they are. It may look something like this:

AAA: 20 million dollars A: 30 million dollars BB: 40 million dollars Junk: 10 million dollars

Now, assume that this bank has got a BB rating. So that means that it has got securities worth 50 million dollars which are better than the rating of the bank itself. That means that this bank may be able to raise money on better terms on such securities, than it will be on the strength of its own name. And this was one of the main factors for the popularity of these ABS.

Investment banks were the big buyers of such securitized instruments and that is why investment banks like Lehmann were the first ones to get hit by the current sub prime crisis. They had bought a lot of the sub prime securities and when the bottom fell out, those securities were worth nothing.
Adding Layers of Complexity

During the housing boom, banks never expected the kind of defaults that we are seeing today. That led many to believe that some part of the A rated tranche should be worth AAA. So then banks took their A tranche and created synthetic tranches out of it and hived some of the A rated tranche as AAA. These were then valued at more than they should have. Then there was the issue of credit default swaps and all these things pretty soon added up to complicated asset structures that became very difficult to value.
Conclusion

The original plan of the US Treasury was to buy the AAA securities (also referred to as Toxic assets) from the banks and transfer the risk of default to the Treasury instead of the bank. However Paulson and Co later changed this plan to directly infuse capital into the banks. This was most probably due to the realization that valuing the AAA securities was a much more difficult task than originally thought. A lot of these AAA securities went into default and that led to a crisis in confidence. There are several asset classes that have been securitized. There is a big fear that mortgages are only the tip of the iceberg. The next wave of defaults may come in credit card debt defaults and the derivative instruments that have credit card debts as their underlying asset.