Technical terms and their explanation in the field of Securitization

When speaking of arrangers in securitization context, typically, an investment bank, responsible for structuring, underwriting, and marketing the securitization transaction is meant.

The entity tasked with collecting principal and interest payments from obligors and managing the portfolio post-transaction after the insolvency of the originator is calles backup servicer.

A corporate services provider is an entity supporting the legal and administrative aspects of the SPV (Special Purpose Vehicle), allowing it to fulfill its securitization purpose efficiently and in compliance with regulatory standards.

A credit insurer is an entity providing insurance against default risk in securitization transactions.

Entities that acquire securities and are entitled to the cash flows generated by the underlying assets are called Investors.

When speaking of issuers in securitization context, it refers to the entity responsible for structuring a marketable financial instrument by pooling various financial assets.

An originator in the context of securitization is the entity that initially owns the assets and wants to sell the assets to gain liquidity out of the asset backed securities transaction.

In the context of securitization, rating agencies are entities that evaluate the quality of securitized products and assign ratings based on predefined criteria.

Usually the originator is referred to as servicer once the assets have been sold. The servicer is responsible for the ongoing administration and servicing of the securitized assets.

A Special Purpose Vehicle (SPV) is a company-construct with an asset or liability structure and legal status that ensures its obligations remain secure even if the parent company goes bankrupt.

A trustee in the context of securitization is an entity acting in a fiduciary capacity, primarily safeguarding the rights of the investors.

Asset-Backed Commercial Paper (ABCP) is a short-term investment vehicle set up by a bank or other financial institution and backed by collateral such as trade receivables. It is issued by a special purpose vehicle (SPV) and has a maturity date of no more than 270 days. The distinction between an asset backed security (ABS) and asset backed commercial paper (ABCP) is primarily one of the tenures of the paper.

Asset-Backed Securities (ABS) are bonds or notes backed by financial assets, typically loan portfolios. An asset-backed security (ABS) is a financial instrument derived from a pool of assets, such as loans or receivables, which act as collateral. These securities are typically structured and sold to investors in the form of bonds and commercial papers. The cash flows generated by the underlying assets, such as loan repayments or interest payments, provide the income stream for ABS investors. The securitization process enables financial institutions to convert illiquid assets into marketable securities, promoting liquidity and facilitating capital market funding. Various types of ABS exist, including mortgage-backed securities, auto loan-backed securities, and credit card-backed securities.

The priority order in which cash inflows to the SPV are allocated to investors.

A strategy employed to improve the credit profile of a structured financial product and which can be structured in the form of amongst others discounts, over-collateralization, reserves or specific ledgers.

The first loss or equity tranche is the lowest-ranking and riskiest part of a securitization that absorbs the initial losses from the underlying assets and protects the higher-ranking tranches.

 A mezzanine tranche is a layer of loss absorption in a securitization or a similar structure that is positioned between the senior tranche (lowest risk) and a junior tranche (equity tranche, highest risk).

In securitization, a portfolio refers to the collection of assets selected for securitization.

Securitization is the process of pooling various types of future cash flows and selling them to third-party investors as securities.

The securitization audit is an audit process conducted to uncover any discrepancies or violations in a securitized financial transaction.

Securitization as a financial process involves the pooling of various financial assets (e.g. loans or leases) into bundled securities. The underlying cash flows are sold to investors in the form of bonds or commercial papers. The goal of securitization for the originator is to gain access to liquidity while the goal for the issuer is to transform illiquid assets into marketable securities, making them more attractive to a broader range of investors.

A senior tranche is a layer of debt securities in a securitization or a similar structure that has the lowest risk and the lowest return, as it suffers losses last.

Subordination is a technique used to protect senior tranches from defaults in securitization.

A tranche is a specific class of bonds within an offering, each tranche offers varying degrees of risk and return.

A funding period is a time interval during which a securitization vehicle can issue new securities backed by assets that are acquired within that period.

In the time between two funding dates pool deductions such as principal and interest payments or cash collections are being exchanged with new assets by the originator to maintain the value of the pool of securitized assets via so-called replenishment runs.

Triggers are conditions within a securitization transaction that, when met, lead to potential actions or adjustments.

In securitization, a cash reserve is an account where excess spread is deposited until the balance reaches a specified level. Any losses are paid out of the account and the excess spread is again redirected to replenish it.

A reserve account used to cover losses due to dilution. Dilution refers to the reduction in value of receivables due to non-cash credits such as product returns or discounts.

A reserve to cover the potential for future losses on securitized assets due to default.

A credit enhancement technique where the value of collateral pledged exceeds the debt issued.

A portion of the monetary equivalent of the assets set aside as a reserve to cover potential risks in the securitization transaction such as losses or dilutions.

Reserves in securitization refer to the funds that are set aside by the originator or arranger of a securitization transaction to cover potential losses, dilutions and costs that may arise from the underlying assets and the transaction itself.

In securitization, risk management is the process of identifying, assessing, and prioritizing risks associated with the securitized assets. Participants in the securitization process use various techniques to manage risk, such as over-collateralization, first-loss piece, equity piece, cash reserves, and waterfall structures. The over-collateralization technique involves the provision of additional collateral to the investors while cash reserves consist of excess spread which is deposited until the balance reaches a specified level. The first-loss piece is the first tranche of securities that absorbs any losses, while the equity piece is the last tranche of securities that receives any residual cash flows. The waterfall structure determines the order in which cash flows are distributed to the investors.

The funds in this account are used to cover potential shortfalls in interest payments to investors. It serves as a form of credit enhancement, providing additional protection to investors.

In securitization, costs refer to the expenses incurred by the parties involved in the process. These costs include management and system costs, legal fees, underwriting fees, rating fees, and ongoing administration. An allowance for unforeseen costs is usually essential in securitizations.

Costs incurred in procuring credit insurance to cover default risk in securitization transactions.

The funding costs are the costs that incurred in raising capital for securitization.

An origination fee in the context of securitization is a fee charged by lenders for processing a new loan application.

The RPA is a legal agreement between the seller of the assets and the buyer, typically a special purpose vehicle (SPV) or a conduit. It outlines the terms and conditions under which the seller agrees to sell the assets to the buyer. It is a critical document in securitization transactions as it sets out the terms of the sale of the underlying assets, including the purchase price, representations and warranties, and the rights and obligations of the parties involved.

The European Parliament and Council Regulation (EU) 2017/2402 lays down a general framework for securitization and creates a specific framework for simple, transparent, and standardized securitization. It also establishes due diligence, risk retention, and transparency requirements for parties involved in securitizations, criteria for credit granting, requirements for selling securitizations to retail clients, a ban on re-securitization, requirements for SPVs as well as conditions and procedures for securitization.