Asset backed security

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An asset-backed security (English asset-backed security , ABS) is a structured financial product , wherein the entitlements of the holder by a stock to demands are secured. Usually, the payment claims against a made -purpose entity ( English special purpose vehicle , SPV short), exclusively for the purchase of receivables usually more their funds creditor uses and this for a security securitized . The payment claims are covered by the stock of claims that are transferred to the special purpose vehicle. In addition, the claims can be secured by the security granted in each case , which is held via a trustee for the benefit of the holder of the asset-backed security. Receivables sellers in such a transaction are usually banks , who make parts of their credit receivables tradable in order to refinance themselves .

functionality

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Asset-backed securities may be after the true-sale - or Synthetic-sale method are securitized.

Types

Almost all types of exposure can form the basis for asset-backed securities, provided they meet certain conditions. These include, among other things, the transferability of legal claim ownership, the generation of regular and assignable payment flows and historical performance data. Preferably, financial assets with an average credit risk and a term of more than one year are brought into the pool and upgraded to a very good credit risk through diversification and overcollateralization. Primarily, these are receivables from loans , high yield bonds , mortgages , credit cards transactions, license - and franchise shops, other assets, leasing contracts and trade payables.

The term asset-backed security is understood in technical jargon both as a generic term and as a specific product group. A distinction is made as follows:

Essence

With a transaction of asset-backed securities, tradable securities are issued which, due to the diversification of the underlying risk, promise the investor a lower risk. According to the Deutsche Bundesbank, "a credit institution sells parts of its receivables portfolio to a company set up specifically for a specific or a majority of such transactions, which in turn refinances itself through the issue of securities, asset-backed security (ABS)."

Additional risk improvement

A further risk reduction arises from additional safeguards (English credit enhancements ), which secure the transaction or improve the rating. Legally and economically sensible forms are overcollaterization , in which the assets resulting from the receivables exceed the nominal value of the securities issued, the division of the asset-backed securities into senior and subordinate tranches (subordination) and the establishment of a reserve account ( spread account ) on which excess payments are deposited. Alternatively, the pool of receivables can be transferred to the special purpose vehicle with a “cash discount” or a guarantee can be provided by the seller of the receivables, an affiliated company or an external third party, for example credit insurance . Bad debt losses from the pool of receivables are intercepted by these security mechanisms. In addition to these default safeguards , liquidity facilities are also used that are only drawn on in the event of market disruptions or liquidity bottlenecks. It is common to create a liquidity reserve using a "back-up" line. Often several forms of security are combined. The aim is to strike a sensible balance between improving the rating and increasing costs.

Advantages and disadvantages of the transaction for a bank as a seller of receivables

Creation of liquid funds

The bank receives the equivalent of the sold receivables as liquid funds and can now use them profitably. On the one hand, it can use this to reduce liabilities. This shortens the balance sheet and increases the equity ratio. The sale on the balance sheet also improves its rating and thus achieves lower refinancing costs. The inflow of funds can also be reinvested in more profitable products.

The cost of capital of an investment funded through asset-backed securities is lower than that of traditional debt financing . The reason for this is the independence of the creditworthiness of the separated pool of receivables from that of the selling credit institution achieved with the “true sale”. With the sale of the receivables, the default risk is also transferred to the special purpose vehicle. The regulatory capital relief that accompanies this risk transfer is the most important reason for using asset-backed securities. Depending on the protection seller, the bank must hold less or no liable equity capital for the loans sold .

Great effort

Disadvantages of transactions in asset-backed securities result primarily from the complicated construction and the associated costs. For a cost-covering function, the interest income of the loans must be sufficient to cover the capital market interest to the investors as well as the costs of the transaction. When selling, the bank of course also loses the interest income from the loans sold. A so-called “clean break” is a condition for the desired equity relief: the bank may no longer incur any default risk from the receivables sold if the borrowers become insolvent.

Transactions in asset-backed securities cause one-time and ongoing costs, with the proportion of fixed costs being very high. ABS are only economical when the capital requirement is high.

Obligation to capitalize the claims at the special purpose vehicle

In order to achieve the desired positive aspects for all parties, the prerequisite is that the receivables are transferred to the assets of the special purpose vehicle and thus the credit risk of the receivables is clearly separated from the credit risk of the selling company (originator). As a consequence, this approach ensures that the asset-buying special-purpose vehicle does not belong to the originator's scope of consolidation and that the obligation to capitalize the receivables is placed with the special-purpose vehicle.

Tax and commercial law advantages

Advantages can be achieved from German commercial and tax law: Instead of an actual sale, only the credit risk is transferred via a credit default swap . This eliminates the trade tax liability for the interest income of the special purpose vehicle.

Regulatory benefits

Until Basel II came into force, German regulatory law offered incentives for the use of asset-backed securities (ABS). Default risks must be backed with equity. The backing can be significantly reduced by securitizing receivables with good credit ratings . This process is also known as regulatory arbitrage. Supervisory authorities only recognize the shift of credit claims from the originator's portfolio to the special purpose vehicle if the risk transfer actually takes place ( clean break ). This means that the originator is then no longer liable for the requirements being met.

See also

literature

  • Bär, HP (2000): Asset Securitization - The securitization of financial assets as an innovative financing technique and a new challenge for banks. 3rd, unchanged. Edition, Haupt, Bern et al.
  • Paul, S. (2001): Asset Backed Securities. in: Gerke, W./Steiner, M. (Ed.), Handwortbuch des Bank- und Finanzwesens, 3rd edition, Schäffer-Poeschel: Stuttgart, pp. 126-133.
  • Bund, S. (2000): Asset Securitization - Applicability and possible uses in German universal credit institutions. Hohenheim.
  • Working group “Financing” of the Schmalenbach Society, German Society for Business Management eV (1992): Asset Backed Securities - a new financing instrument for German companies? in: Journal for business research, vol. 44, pp. 495-530.
  • Schmeisser, W. / Leonhardt, M. (2006): Asset-Backed Securities Transactions as a Financing Alternative for German SMEs. 1st edition, Munich and Mering.

Web links

Individual evidence

  1. ↑ Since with ABCP the receivables are not held by a special purpose vehicle but by a so-called conduit as a regular issuer, ABCP are sometimes viewed as not belonging to ABS.
  2. ↑ Monthly report of the Deutsche Bundesbank July 1997.