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AFM Securitisation & Tranching
- Most common securitisation for mortgages, credit cards, car loans or other forms of Credit
- securitisation
- method to 'lay off' risk
- Remove Risk attached to future cash receipts
- Converts back to Cash
- Which can be lent again
- Which can be lent again
- Converts back to Cash
- Remove Risk attached to future cash receipts
- method to 'lay off' risk
- SPF
- Asset
- Future Cash flow
- Future Cash flow
- Asset
- Transfer lending to SPV's
- SPV
- Special Purpose Vehicle
- a company specifically created for securitisation
- a company specifically created for securitisation
- Special Purpose Vehicle
- Example: Mortgage
- SPV purchases the mortgage book for cash
- It raises the money to purchase by issuing bonds backed by the income stream from the Mortgages
- It raises the money to purchase by issuing bonds backed by the income stream from the Mortgages
- Sub Prime Mortgages
- High Risk
- Secured by derivative-style instrument CDO
- CDO
- Collateralised debt Obligations
- Way to repack risk of a large number of risky assets
- concentrate risk into investment tranches
- Some investors take more % risk for bigger return
- others take little of no risk for a much lower return
- Some investors take more % risk for bigger return
- concentrate risk into investment tranches
- Mechanism to transfer losses to investors with the highest appetite for Risk
- Such as hedge funds
- leaving bulk of investors (banks) with low risk
- leaving bulk of investors (banks) with low risk
- Such as hedge funds
- structure
- Tranche 1
- High Risk
- Equity Tranche
- 10% Value of mortgage pool
- absorb any loss of mortgage defau;ts
- until principle exhausted
- at which point investment worthless
- at which point investment worthless
- until principle exhausted
- absorb any loss of mortgage defau;ts
- 10% Value of mortgage pool
- Equity Tranche
- High Risk
- Tranche 2
- Intermediate or "Mezzanine" tranche
- 10% of Principle
- absorb losses not absorbed by Equity Tranche
- until Principle is also exhausted
- until Principle is also exhausted
- absorb losses not absorbed by Equity Tranche
- 10% of Principle
- Intermediate or "Mezzanine" tranche
- Tranche 3
- AAA or "senior" tranche
- Balance Pool Value
- Will absorb residual losses
- Proportion = Structure
- High Risk
- 80%
- 10%
- 10%
- 10%
- 10%
- 80%
- Low Risk
- 40%
- 20%
- 20%
- 20%
- 20%
- 40%
- Equity
- Mezzanine
- AAA
- High Risk
- Will absorb residual losses
- Balance Pool Value
- AAA or "senior" tranche
- Tranche 1
- Repayment
- All mortgage repayments used in order of tranche
- 1st AAA
- 2nd Mezzanine
- 3rd Equity
- 1st AAA
- All mortgage repayments used in order of tranche
- Collateralised debt Obligations
- CDO
- Secured by derivative-style instrument CDO
- High Risk
- SPV purchases the mortgage book for cash
- SPV
- securitisation
- Other reasons for Securitisation
- enhance credit rating
- use low risk cashflows
- Example: Commercial Rental
- Diverted to a "Ring-fenced" SPV
- Diverted to a "Ring-fenced" SPV
- Example: Commercial Rental
- use low risk cashflows
- enhance credit rating
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