Investment Insights

A primer on securitisation

What we refer to as securitised debt is known by many names: structured products, structured finance, securitised credit, or it can be known by its acronyms, ABS, MBS, CMBS, and CLO1 to name a few. With this many monikers, it’s no wonder that this area of finance is considered more complex than ‘traditional’ fixed income.

25/10/2019

Michelle Russell-Dowe

Michelle Russell-Dowe

Head of Securitized, US Fixed Income

Securitised debt is backed by financial contracts. For example, auto ABS are backed by loans secured by automobiles. As the loans are repaid by the borrowers, the payments are forwarded to the securitisation trust and used to repay the ABS bonds that have been issued. The securitisation trust is a key concept which we will discuss further in this primer, but the trust itself is a vehicle set up to own the loans and to issue the debt. The “security” for the ABS debt is two-fold: first, the primary security is the financial contract, or loan, which provides that the borrower repay their debt. Second, it is common that the financial contract contains terms which provides for recourse to collateral (in this case, the automobile) should the borrower cease making payments as required by the auto loan contract. These two components represent the “secured” and “collateralised” nature of the debt, which is our first pillar (we will dive deeper into the other two pillars later in the paper).

Size is a surprise; the consumer debt, housing debt and real estate debt are large markets. Consumer debt, real estate debt, and commercial and residential mortgage debt, are all substantial, sizable markets. Figure 1 helps illustrate this point as there is a wide universe of debts that are securitised. On the consumer side, there are auto loans, cell phone loans, mortgage loans, student loans, personal loans, credit card receivables and even peer-topeer lending. As well, there are loans that face a business rather than a consumer; these are often commercial real estate mortgage loans, small business loans, equipment leases, cellular tower loans, solar power purchase contracts, insurance linked-securities, or even leveraged loans. This diversity means that the universe is large. The outstanding current face value of “securitised debt” globally is $12.9 trillion. This makes it one of the largest debt markets outstanding.

 

Securitisation is a sizable market, comprised of diverse asset classes

Read the full report. 

Important Information:
This material has been issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders) for information purposes only. It is intended solely for professional investors and financial advisers and is not suitable for distribution to retail clients. The views and opinions contained herein are those of the authors as at the date of publication and are subject to change due to market and other conditions. Such views and opinions may not necessarily represent those expressed or reflected in other Schroders communications, strategies or funds. The information contained is general information only and does not take into account your objectives, financial situation or needs. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this material. Except insofar as liability under any statute cannot be excluded, Schroders and its directors, employees, consultants or any company in the Schroders Group do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this material or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this material or any other person. This material is not intended to provide, and should not be relied on for, accounting, legal or tax advice. Any references to securities, sectors, regions and/or countries are for illustrative purposes only. You should note that past performance is not a reliable indicator of future performance. Schroders may record and monitor telephone calls for security, training and compliance purposes.