Introduction to Securitization

KEY POINTS OF THE CHAPTER

• Credit enhancements are mechanisms for providing credit support for a securitization transaction.

• The type of asset securitized and the type of investor targeted dictates the nature and extent of credit enhancement required in a transaction.

• The credit enhancement level for every bond class in a structure to be rated is based on the target rating sought for that bond class.

• Because all credit enhancement has a cost associated with it, in creating the structure the structurer will perform an economic analysis of the cost of further enhancement versus the improved execution of the transaction.

• The amount of credit enhancement needed to obtain a specific credit rating is specified by the rating agencies from which a rating is sought and is referred to as the sizing of the transaction.

• The mechanisms for credit enhancement can be classified into three categories: (1) originator-provided, (2) structural, and (3) third-party provided.

• Originator-provided credit enhancement refers to credit support where a part of the credit risk of the asset pool is assumed by the originator/seller and includes cash, assets in excess of the liabilities, and retained profits.

• Excess spread, the most natural form of originator-provided credit enhancement and the one that is least burdensome to the originator/seller, is the interest not paid to the bondholders nor used to pay fees.

• If the excess spread is not paid to the originator/seller either up-front or ...