What is Asset Securitization?
Asset-backed securities are securities which are based on pools of underlying assets. These assets are usually illiquid and private in nature. A securitization occurs to make these assets available for investment to a much broader range of investors. The “pooling” of assets makes the securitization large enough to be economical and to diversify the qualities of the underlying assets. A special purpose trust or instrument is set up which takes title to the assets and the cash flows are “passed through” to the investors in the form of an asset-backed security. The types of assets that can be “securitized” range from residential mortgages to trade receivables and even music royalties. The asset-backed security usually qualifies for a top rating and enables the issuing company or bank to raise funds at a very attractive rate, while freeing up capital and retaining customer relatiuonships and servicing revenues.
