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CRMM-4-securitization.html
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<!doctype html>
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<head>
<meta charset="utf-8">
<title>Credit Risk Measurement and Management | Chapter 4 | Securitization</title>
<meta name="description" content="Financial Risk Manager Part 2 Study Materials">
<meta name="author" content="MacLane Wilkison">
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<body>
<div class="reveal">
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<div class="slides">
<section>
<h1>Chapter 4</h1>
<h3>Securitization</h3>
<p>
<small>Created for <a href="http://alchemistsacademy.com">Alchemists Academy</a> by <a href="http://alchemistsacademy.com/about">MacLane Wilkison</a></small>
</p>
</section>
<section>
<h2>Introduction</h2>
<p><em>Definition: The process by which a firms sells credit-sensitive assets to a third party that in turn issues securities whose cash flows are backed by the original assets as collateral</em></p>
</section>
<section>
<section>
<h2>Securitization Process</h2>
<img src="images/CRMM4/basic-securitization-structure.png" alt="basic securitization structure" />
<aside class="notes">
1. Cash flow on assets; 2. Asset ownership conveyed to SPE in true sale; 3. Purchase price for assets; 4. Fees; 5. Advisory/monitoring services; 6. Issuance of securities; 7. Initial purchase price for securities; 8. Assets deposited in trust or custodial account; 9. Cash flow on assets; 10. Custodial fees; 11. Initial purchase price for securities; 12. Distribution of securities; 13. Principal and interest on securities;
</aside>
</section>
<section>
<h2>Major Players</h2>
<ul>
<li>Sponsor - institution that initiates the securitization</li>
<li>Originator - original asset owner</li>
<li>Transferee - counterparty to the bilateral asset sale</li>
<li>Trustee - investors' agent</li>
<li>Custodian/Servicer - collects and disburses cash flows</li>
<li>Structuring agent - originator's advisor</li>
<li>Underwriter - markets and distributes the securities issued by transferee</li>
<li>Rating agencies - render assessments of credit quality</li>
<li>Law firms - provide legal counsel</li>
<li>Regulatory agencies</li>
<li>External risk transfer and risk finance counterparties</li>
</ul>
</section>
<section>
<h2>Consolidation</h2>
<p>In order to avoid consolidating the assets back on the originator's balance sheet, a 'true sale' must occur'</p>
</section>
</section>
<section>
<h2>Credit Enhancement</h2>
<ul>
<li>Internal:</li>
<ul>
<li>Direct equity issue</li>
<li>Holdback</li>
<li>Cash collateral account</li>
<li>Excess spread</li>
</ul>
<li>External:</li>
<ul>
<li>Insurance, wraps, and guaranties</li>
<li>Letter of credit</li>
<li>Credit default swap</li>
<li>Put option on assets</li>
</ul>
</ul>
<aside class="notes">
Internal credit enhancements are provided by a participant inside the structure. External credit enhancements represent credit risk transfer from the SPE to anohter firm.
</aside>
</section>
<section>
<h2>Liquidity Support</h2>
<ul>
<li>Liquidity risk - risk that underlying assets serving as collateral may not generate enough cash to satisfy P&I obligations</li>
<li>Internal support:</li>
<ul>
<li>Liability design and maturity structure</li>
<li>Reserves</li>
</ul>
<li>External support:</li>
<ul>
<li>Letters of credit with recourse</li>
</ul>
</ul>
</section>
<section>
<h1>THE END</h1>
<h3><a href="http://alchemistsacademy.com">AlchemistsAcademy.com</a></h3>
</section>
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