ANALISIS SITUACIONAL DE SSOMA

The objective of this chapter was to define securitization and to gain broader understanding of the fundamentals of securitization by providing a thorough literature research. Securitization can be defined as a structured finance technique in which a collection of unmarketable, regular and predictable cash flow generating assets that may vary in maturity and quality, are converted into marketable securities. These securities are issued by a legal entity (SPV) and sold to (institutional) investors, who are repaid with interest and principal payments generated by the asset portfolio. Securitization has the potential to bring a lot of advantages for both the originator and the investor. By introducing securitization, it is possible for the originator to: reduce funding costs, achieve off balance sheet funding, achieve an alternative form external funding and manage corporate risk. For BFM it is an interest funding strategy since it has the potential to raise capital form capital markets in a cost- effective way. Securitization enables investors to: invest in a tailor-made product, diversify investment sources, invest in unusual investments and make investment decisions based on credit ratings provided by rating agencies. However, there is a downside to securitization. The credit crisis in 2007 has shown that securitization does not guarantee positive outcomes. Expected losses have been calculated inaccurately by rating agencies. Moreover, insufficient control & understandability of the quality of the underlying assets (mortgages) and the absence of data on the performance of the underlying assets have resulted in incorrect credit ratings.

ABS transactions can be structured in many different ways based on the asset type and originators motivation. However, the process of securitization of different originators or asset types shares many similarities. For example, a number of primary roles are involved in every securitization process, but the executing parties may differ by each securitization transaction. The process generally includes the establishment of a special purpose vehicle (legal forms: limited partnership, limited liability company, trust, or corporation). An SPV serves as a vehicle between originator and investors for the transformation of illiquid assets into liquid securities and should be designed bankruptcy remote from the originator of the assets and any other creditor. It protects investors in case of bankruptcy events of the originator, hold the assets portfolio and issues securities with different risk profiles. Due to the fact that the pool of assets is separated from the bankruptcy risk of the originator, it has the potential to increase the creditworthiness of the asset portfolio and ensure much lower funding costs for the originator.

Two of the main features of securitization are credit enhancement and credit rating. Rating agencies play a key role in the process of securitization as they assess the creditworthiness of an entity, debt instrument or other financial instrument. It is the job of rating agencies to bridge the asymmetric information gap between sellers and buyers of securities and provide reliable standardized information to the market in the form of a credit rating. A credit rating in a securitization is primary based on credit risk, which is the risk that the obligor will default on its obligation to make periodically payments

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under an agreed contract, resulting in a loss. A key input for achieving a proper credit rating is (historical) performance and portfolio data, which are used to estimate a full probability distribution of the expected credit loss of the pool and its variance, based on the estimates of the expected credit loss and its variance. The costs and prices (and thus quality) of a securitization transaction are strongly dependent on the assigned credit rating.

Credit enhancement is a method to achieve greater certainty for investors and thus better credit ratings from rating agencies. This chapter has explained different credit enhancement methods to mitigate several risks in the pool of assets that can improve the credit rating of the securitization. Internal credit enhancement methods are credit protections that are obtained from the collective generating cash flows. Main forms are subordination, excess spread, reserve account and overcollateralization. External credit enhancement methods are credit protections that are obtained from third parties against a certain fee. Main forms are monoline insurance and letter of credits. The alignment and final organization of the level credit enhancement is generally done in consultation with the credit rating agency in order to obtain a preferable credit rating. Subordination is the main form of credit enhancement. It is generally used in all securitization transaction. BFM is required to retain a minimum percentage of 5% of the total portfolio volume. Above that, it enables SBM to take a position in a tranche. The right balance of interest of BFM and SBM in tranches of the securitization can increase the quality of the most senior tranche and result in a higher rating on that tranche.

With this chapter we have answered the first research question: What is securitization? This chapter will serve as a theoretical basis for the remainder of this report. In the next chapter we will discuss the asset portfolio of BFM.

27 Master Thesis Vincent Bakker 21-03-2014