Almost all companies do have an effective portfolio management nowa-days. 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 EUR, the receivables grow to a value of 10 million EUR or more. This capital is usually unavailable for the company and may become available using Asset Securitisation to refinance the receivables. Nowadays, Securization is exercised in many branches, but the focus of this paper should be on ABS-projects with banks. 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 capital costs and the balance sheet rations. 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. ABS might be designed in many different variants. To consider all of them, a realistic volume of this work would be exceeded. Target of this paper is to give an overview about the function of ABS and the affiliated possibilities and chances to use them in practice.
In the first part of this paper, the question of definition and of the basic structure of Asset Backed Securities will be examined. Furthermore, the requirements for an Asset Securitisation in respect to the portfolio of as-sets will be explained.
The second part is concerned with a detailed outline of the two groups of ABS, namely True Sale and Synthetic Sale and the allied key role of the KfW. Thereby, the questions of adding value and benefits for the differ-ent participants within structured finance transactions are examined.
In the third part, general facts and figures as well as the advantages and disadvantages from the bank’s perspective are regarded.
Finally, our conclusion informes about the current situation of the Euro-pean market for securization and ABS and its propable development as a modern financing insrument, especially for banks, in the future.
Table of Contents
1 Introduction
2 Origination
3 Change in behaviour of banks
4 Definition of ABS
4.1 Example of ABS
4.2 Structure Variants of ABS
4.2.1 Pass-Through Structure
4.2.2 Pay-Through Structure
5 Function of ABS
5.1 Key Players
5.2 True Sale
5.3 Synthetic Sale and KfW
6 Facts and Figures
7 Advantages
8 Disadvantages
9 Current Situation
10 Conclusion
Objectives and Core Topics
This paper examines the function, structure, and practical application of Asset Backed Securities (ABS) as a financial management tool for international corporations and banks, specifically analyzing how securitization can improve capital costs and balance sheet ratios.
- The basic definition and origin of Asset Backed Securities.
- Technical structure variants including Pass-Through and Pay-Through methods.
- The roles of key participants like the Special Purpose Vehicle (SPV) and the KfW.
- Comparison of True Sale and Synthetic Sale securitization models.
- Evaluation of the advantages and disadvantages of ABS from a banking perspective.
Excerpt from the Book
4.2.1 Pass-Through Structure
With this figuration the Cash Flows of the administrated asset pool are directly transferred to the investors of the ABS. If interest- and amortization-payments of the receivables are paid in a monthly rhythm, the payments to the investors are paid analogically every month in pro-rata share, too. So the payments of the assets are forwarded unchanged and isochronously. In ABS-operations with loan portfolio of banks three kinds of Cash Flow-streams are possible:
• scheduled interest payments
• scheduled amortization payments
• prematured prepayments
Due to this direct method, prepayments have a straight impact to the investors, that’s why it is not possible to calculate the duration of Pass-Through-Papers exactly. Consequently, duration will be shorter in case of quickening and elongates of course if there is a slowdown in payments. With this constellation, the investors accept an interest agreement without knowing the exact maturity and capital lockup of their investment. Accordingly, these fact in combination with an affiliated risk of change in interest levels make Pay-Through papers very little attractive for international investors. There are two basic risks:
If the papers have been bought under or over par, the yields may change because of shorter maturities. The second problem is the trouble with reinvestment. If the interest niveau decreased, the pretermed obtained money just can be invested for lower interest rates. By reason of these aspects, the price-fixing of Pass-Through ABS is very difficult and an early valuation for investors is highly complicated.
Summary of Chapters
1 Introduction: Provides an overview of the importance of securitization for banks and corporations in light of Basel II requirements.
2 Origination: Traces the historical development of ABS in the US financial system during the 1970s and 1980s.
3 Change in behaviour of banks: Describes the shift from traditional "buy-and-hold" banking to "buy-and-sell" models to optimize balance sheets.
4 Definition of ABS: Explains the fundamental structure of ABS and distinguishes between Pass-Through and Pay-Through variations.
5 Function of ABS: Details the key players involved, the True Sale process, and the role of KfW in synthetic securitization.
6 Facts and Figures: Presents statistical data on the growth and market volume of ABS in Europe.
7 Advantages: Discusses how ABS generates liquidity and allows banks to manage risk and improve capital structure.
8 Disadvantages: Highlights the complexity, high costs, and administrative burdens associated with securitization.
9 Current Situation: Analyzes the impact of the US real estate crisis on the ABS market and specific affected institutions like the IKB.
10 Conclusion: Summarizes the potential of ABS as a flexible, innovative risk management instrument for the future.
Keywords
Asset Backed Securities, ABS, Securitization, Basel II, Special Purpose Vehicle, SPV, True Sale, Synthetic Sale, KfW, Credit Default Swap, Originator, Tranches, Liquidity, Risk Management, Financial Instruments
Frequently Asked Questions
What is the core focus of this paper?
The paper focuses on the function and structure of Asset Backed Securities and their practical application as a modern financing instrument for banks and international corporations.
What are the central topics discussed?
Central topics include the origination of ABS, structural variants (Pass-Through vs. Pay-Through), market roles, True Sale versus Synthetic Sale models, and the advantages/disadvantages from a bank's perspective.
What is the primary objective of the work?
The primary goal is to provide a comprehensive overview of how ABS can be used to improve balance sheet ratios and capital costs, while considering the regulatory environment like Basel II.
Which scientific methods are primarily utilized?
The paper relies on descriptive analysis of financial structures and a review of existing literature and market data provided by institutions like the KfW.
What does the main body cover?
It covers the definition and technical mechanisms of ABS, key players involved in the transaction, the differences between True and Synthetic sales, and empirical facts about the European ABS market.
Which keywords characterize the work?
Key terms include Securitization, ABS, SPV, True Sale, Synthetic Sale, Risk Management, Liquidity, and Basel II.
How does the KfW facilitate the ABS market?
The KfW created standardized platforms like PROMISE and PROVIDE to simplify the securitization process, enabling even medium-sized companies and smaller banks to access the ABS market.
What makes the "True Sale" process distinct?
True Sale involves the legal separation of receivables from the originator's balance sheet, transferring both ownership and credit risk to an SPV, thereby creating an off-balance-sheet solution.
- Quote paper
- Gina Slabke (Author), Carsten Albrecht (Author), 2007, Asset Backed Securities – A solution for financial management in International Corporates?, Munich, GRIN Verlag, https://www.grin.com/document/84122
