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8498812
AFM Securitisation & Tranching
Description
Mind Map on Securitisation & Tranching, created by Denise H on 10/04/2017.
No tags specified
advanced financial management
5. treasury and risk management techniques
Mind Map by
Denise H
, updated more than 1 year ago
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Created by
Denise H
over 7 years ago
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Resource summary
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
SPF
Asset
Future Cash flow
Transfer lending to SPV's
SPV
Special Purpose Vehicle
a company specifically created for securitisation
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
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
Mechanism to transfer losses to investors with the highest appetite for Risk
Such as hedge funds
leaving bulk of investors (banks) with low risk
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
Tranche 2
Intermediate or "Mezzanine" tranche
10% of Principle
absorb losses not absorbed by Equity Tranche
until Principle is also exhausted
Tranche 3
AAA or "senior" tranche
Balance Pool Value
Will absorb residual losses
Proportion = Structure
High Risk
80%
10%
10%
Low Risk
40%
20%
20%
Equity
Mezzanine
AAA
Repayment
All mortgage repayments used in order of tranche
1st AAA
2nd Mezzanine
3rd Equity
Other reasons for Securitisation
enhance credit rating
use low risk cashflows
Example: Commercial Rental
Diverted to a "Ring-fenced" SPV
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