Almost all companies do have an effective debenture management nowadays. Nevertheless, it is not unusual for companies to have very high values in receivables. Especially for companies with a turnover of more than € 100 million the receivables grow to a value of € 10 million or more (IKB (2005), p.1). This capital is usually unavailable for the company; it may become available using Asset Securitisation to refinance the receivables. The influence of Basel II on the behaviour of credit institutions further reinforces the importance of Asset Securitisation as a tool for companies to improve the capital costs and the balance sheet rations as the investigation in this paper will point out. This again has implications for the rating of enterprises.
Due to the growing interest in Asset Securitisation, a lot of research has been done by the European financial institutions.
In the second part of this paper, the question of a definition and of the basic structure of an Asset Backed Security will be examined. Furthermore the requirements for an Asset Securitisation in respect to the portfolio of assets will be explained.
The third part of this paper is concerned with the possibilities of traditional ABS for companies, that are carried on by the advantages and disadvantages of Asset Securitisation for the participants.
Within structured finance the questions of adding value for the different participants within structured finance transactions is examined.
In the forth part the possible use of structured finance products for enterprises is described examining especially the question of where value is added.
Finally the last part gives an overview of the current situation of the European market for structured finance products and ABS and its projected development.
Table of Contents
1 Introduction
2 Asset Backed Security
2.1 Definition of an Asset Backed Security
2.2 Basic structure of an ABS transaction
2.3 Features required of a receivables’ portfolio
2.4 Variations in traditional asset securitisation
2.4.1 Payment management
2.4.2 Number of originators
2.4.3 Frequency of assets purchase
2.4.4 Kind of assets
3 ABS as possibility for companies to refinance
3.1 Advantage of ABS
3.2 Disadvantage of ABS
4 Structured finance
4.1 Definition
4.2 Basic structure of SF products
4.3 Features of the underlying assets
4.4 CDO – a structured finance product
4.5 Source of value within CDOs
4.5.1 Tranching
4.5.2 Market completion and segmentation
5 Current market situation and development prediction
Objectives and Research Themes
This paper examines the role of Asset Backed Securities (ABS) and Structured Finance (SF) as financial instruments for corporate refinancing. It investigates the basic structures, the economic advantages and disadvantages for companies, the theoretical mechanisms of value creation through tranching and market segmentation, and provides an overview of the European market status and development trends.
- Mechanisms of Asset Securitisation and ABS transactions
- Refinancing potential and cost optimization for enterprises
- Theoretical frameworks of Structured Finance and CDOs
- Information asymmetry and the role of tranching
- Market dynamics, growth drivers, and future outlook in the EU
Excerpt from the Book
2.2 Basic structure of an ABS transaction
The basic idea behind the securitisation of receivables is to free the capital that is tied up in the receivables. To do this, the receivables will be grouped to a pool and then sold to a legally independent entity, a so called special purpose vehicle (SPV) or special purpose entity. This SPV is only founded for the purpose of buying the receivables and emitting a security. Through the transaction with the SPV, the company gains liquidity. The SPV finances the price of the receivables using the emission of a security – the Asset Backed Security. The interest and repayment of the securities are paid out of the cash flows that are generated from the receivables in the company.
The ABS transactions proceeds in detail as follows (see also Fig. 1, p. 4): At first the company (originator) groups the assets, that will generate cash flows in the future, in a pool. The company will try to diversify this pool as much as possible according to the demands of the market. The portfolio of the pool has to undergo an inspection of the arranging bank or financial institution (arranger) and, as the case may be, of a rating agency, concerning the degree of diversification and the historical probability of default within the receivables’ portfolio. Furthermore, the debenture management of the company will be examined concerning its efficiency as it will continue to be responsible for the receivables of the company in the future.
Summary of Chapters
1 Introduction: Provides an overview of the challenges companies face regarding receivables management and outlines the scope of the paper on ABS and structured finance.
2 Asset Backed Security: Defines the ABS concept and details the structural processes, requirements, and variations involved in traditional securitisation.
3 ABS as possibility for companies to refinance: Analyzes the motivation for companies to use ABS, specifically focusing on liquidity gains and capital cost reduction, while addressing the associated risks.
4 Structured finance: Explores advanced financial instruments, specifically CDOs, and discusses theoretical value creation through tranching and market completion.
5 Current market situation and development prediction: Evaluates the growth of the European ABS and SF markets, highlighting the influence of Basel II and providing a future outlook for these financing forms.
Keywords
Asset Backed Securities, Structured Finance, Securitisation, Refinancing, Special Purpose Vehicle, CDO, Tranching, Asymmetric Information, Credit Risk, Capital Markets, Basel II, Liquidity, Market Segmentation, Receivable Management, Financial Intermediation.
Frequently Asked Questions
What is the primary focus of this academic paper?
The paper focuses on the function and application of Asset Backed Securities and Structured Finance products as tools for corporate refinancing and liquidity optimization.
What are the core topics covered in this work?
Central themes include the mechanism of securitisation, the structure of SPVs, the economic rationale for using these instruments, and the theoretical underpinnings of value creation in structured finance.
What is the main research objective?
The objective is to examine how companies can improve their capital costs and balance sheets through securitisation and to analyze how these products create value for various participants in the financial market.
Which scientific methodology is employed?
The work utilizes a descriptive and analytical approach, synthesizing existing literature on financial theory, market data, and institutional reports to explain complex financial structures.
What is covered in the main body of the paper?
The main body covers the definition and structure of ABS, the advantages and drawbacks for issuers, an in-depth look at structured finance and CDOs, and an analysis of the European market status.
How would you characterize this paper with keywords?
Key terms include Asset Backed Securities, Structured Finance, Securitisation, SPV, Tranching, and Information Asymmetry.
How does the author explain the concept of "information destruction"?
The author notes that when assets are pooled and sold, some of the specific private information about the underlying asset quality is lost because the security is priced based on the average quality of the pool.
Why is the "tranching" mechanism significant for investors?
Tranching allows for the creation of securities with different risk-return profiles, enabling investors to choose instruments that match their specific risk appetite and regulatory requirements.
- Quote paper
- Christian Strassburger (Author), 2006, Asset backed securities and structured finance, Munich, GRIN Verlag, https://www.grin.com/document/70415
