AFM Securitisation & Tranching

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Mind Map on Securitisation & Tranching, created by Denise H on 10/04/2017.
Denise H
Mind Map by Denise H, updated more than 1 year ago
Denise H
Created by Denise H over 7 years ago
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Resource summary

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