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.
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.
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