Handbook of Finance: Investment Management and Financial Management

Chapter 75. Structuring Efficient Asset-Backed Transactions

LEN BLUM

Managing Partner, Westwood Capital, LLC

CHRIS DIANGELO

Partner, Dewey Ballantine

Abstract: Securitization allows an issuer to dissect the risks and rewards of investing in a pool of receivables. The risks can be allocated to those market participants that are in the best position to understand and absorb them and thus would do so at the lowest cost. The rewards can be allocated to those market participants who will pay the highest price (or will receive the lowest yield) for those rewards. Allocation of risk and reward, however, must be done in a way so that the transaction is acceptable given tax, legal, regulatory and accounting constraints. Furthermore, the structure must make sense within the originator's/issuer's financing plan. Optimally, the securitization should give the originator a form of sustainable, competitive advantage. A securitization is a transaction in which a company effectively issues securities for which it is generally not corporately liable. The securities are backed by assets. Yet, securitizations can take on a broad variety of attributes that raise unique structuring issues.

Keywords: securitization, asset-backed securities, special purpose vehicle (SPV), credit enhancements, time tranching, coupon tranching, volatility tranching, tax efficiency, prefunding accounts, conduits

This chapter introduces the reader to the considerations that go into structuring efficient asset-backed securities. ...