Asset Backed Securities – A solution for financial management in International Corporates?

Outline

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

11 List of Literature

1 Introduction

Almost all companies do have an effective portfolio 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 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 assets 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 different 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 European market for securization and ABS and its propable development as a modern financing insrument, especially for banks, in the future.

2 Origination

Securitizations of receivables in the today's design have their origination in the 1970's in the USA. In these times, the American financial system worked in a very inefficient way. Those banks that were allowed to give mortgage loans were just allowed to operate in the county where the company's headquarter were established (so called "Regionalbankenprinzip").

With this restriction, a balance of capital flows between the singular counties was impeded. Consequently, there was an increasing demand of mortgaging in the western states of the United States.

Further on, before the year 1970, banks had no long-term refinancing instrument or mortgage loans, so they had to refinance by-short term investments like current accounts. In times of higher interest rate volatility this non -matching maturities solution lead to a rising risk of change in interest rates.

To create a secondary market for mortgage loans, amongst others the state-run Governmental National Mortgage Association (GNMA, "Ginnie Mae") was founded. Accordingly, the first securitization transaction was conducted: GNMA bought mortgage loans from banks and issued simultaneously securities that embodied stakes of the pooled receivable asset. In the middle of the 1980's this securitization method was assigned to Non-Mortgage Assets (Non-Mortgage-ABS). Thereby, it came to a rapid spread of securitizations in the whole USA.

Up to nowadays, the US ABS-market is the largest one although it’s stake on worldwide emissions is declining. A detailed actual view about the allocation of ABS in facts and figures will be shown in progress of the paper.^[1]

3 Change in behaviour of banks

The core business of banks is to accommodate loans. The classic method is to hold loans in the balance sheet as receivables until the end of maturity (buy-and-hold-model). In the course of a growing ABS-market also in Europe banks take more and more position on the "buy-and-sell-model". That means, that they pool their receivables to be able to sell them in an ABS-transaction. Like this, the receivables don't appear in the balance sheet any longer which leads to a better balance sheet structure and accordingly to a better rating. Accessorily, the bank gets new liquidity and is so able to give new loans or to operate in other areas.^[2]

4 Definition of ABS

The basic structure is theoretically easy, but because of large organization efforts difficult to realize in practice. Specified homogeny assets of a company e.g. a bank (Originator), that yield earnings, are combined in a pool and are sold to an investor. The price for the asset pool is refinanced by issued notes of the buyer. The earnings of the asset pool like interest and amortization payments from loans are used for the same reasons for the notes of the investors. With this method it is possible to create a tradable instrument that is legally independent and able to refinance separated from the original owner on worldwide financial markets. The assets are sold to an extra founded, unaffiliated purpose company, the Special Purpose Vehicle (SPV). The SPV owns just little equity and has the function to arrange and administrate the bought of the assets as soon as the emission of the securities. The Asset Pool serves directly as commitment instrument for the issued notes. Usually, the notes represent claim rights but might be also designed in shares that securitize a stake of the whole trust. Due to this Special form of collateralizing it is now easier to understand the item "ABS". The pool of receivables (Assets) is collateralized (Backed) by notes (Securities). For administration, booking, collection and dunning a service agent is appointed.

Accordingly, for the controlling of the whole transaction, especially to maintain bank secret, a trustee is appointed who has priority in access to the assets and also serves as a pay office.^[3]

4.1 Example of ABS

Beside the banking sector, which should be focussed in this paper other branches use ABS to optimize their portfolio management, too. It's just necessary to have an amount of common receivables that are possible to pool. Especially in the American literature there was a separation between Mortgage-Backed-Securities on the one hand and ABS on the other. But as mentioned above, nowadays it is current to securitize other assets beside mortgages, too. As a matter of course, mortgages also are assets, that means, they are also active positions in the balance sheet. That's why the appellation "ABS" is generally used for all kinds of securitization in a wider sense. In a narrower sense, ABS include all kinds of securitization that are not in correlation with real estate affairs. Below in Figure 1, there are several branches listed where ABS became famous during the last years^[4]:

Abbildung in dieser Leseprobe nicht enthalten

Figure 1: Types of Asset backed Securities

Source: Bär, H.P.^[5]

As a prominent example of the non-banking-sector it is interesting to mention the ABS-coup landed by the famous British Singer David Bowie in 1997. Bowie earned 55 Mio. USD from private investors for the disposal of rights on ten of his most famous songs for a period of ten years. Interest and Capital payback of the Bowie Bonds were covered by payments from the sale of old and new records as well as the earnings of rights on songs for the duration of ten years. Consequently, these payments served as assets in contrast to the "normal" ABS-structure considering loan Cash Flows at banking ABS-transactions.^[6]

4.2 Structure Variants of ABS

Asset-Backed Securities may be distinguished in many different ways. In literature, you can often find the differentiation between Pass-Through structures and Pay-Through structures.

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:

[...]

^[1] Cp. EMSE, C. (2004): p. 20-22

^[2] Cp. KfW.de (2007): Europäischer Verbriefungsmarkt. Online in

http://www.kfw.de/DE_Home/Kreditverbriefung/Europaeischer_Verbriefungsmarkt

/index.jsp [04.08.2007]

^[3] Cp. BÄR, H.P. (1997): p.26-30

^[4] Cp. BÄR, H.P. (1997): p.46 et. seqq.

^[5] Cp. Bär, H.P. (1997): p. 47

^[6] Cp. welt.de (2007): Mit dem Verkauf v. Forderungen Geld verdienen…Online in http://www.welt.de/printwams/article114107/Mit_dem_Verkauf_von_Forderungen_Geld_verdienen_wie_David_Bowie.html [07.08.2007]