Written by our fixed income investment team, this educational series explores various segments of the fixed income markets where we are finding value.
- The asset-backed securities market has expanded since 2008, with new types of securitization including marketplace lending
- The marketplace lending industry offers a yield advantage for investors who can exploit inefficiencies in this new and growing market
- Looking beyond the standard lineup of asset-backed securities allows us to add value for our clients
- Securitization is not a new concept. In its most basic form, securitization dates back to the late 18th century. The first modern residential mortgage-backed security was issued by the Government National Mortgage Association in 1970, fueling a dramatic expansion in the housing market.
- A securitized deal begins with an agreement between a lender and a borrower as to the amount borrowed, interest rate paid, collateral to secure the loan, and loan maturity. The borrower’s obligation is then sold or pledged to a trust along with a variety of other similar loans, creating the securitized product.
- Securitized issues are split into tranches, which are categorized into varying degrees of subordination. Each tranche is separate and distinct from the other tranches, and each has a different level of credit protection or risk exposure.
- The primary benefit of securitization is to reduce funding costs. Through securitization, a company that is rated BB but maintains assets that are very high in quality (AAA or AA) can borrow at significantly lower rates, using the high quality assets as collateral, as opposed to issuing unsecured debt.