What can be securitised?
hi all,
As I understand it, anything with a cashflow can be securitised. For example in the case of MBSs, there is a monthly cashflow that an investor will receive because the mortgagor will make payments each month.
I recently read an article on how Barclays' New York office securitised a bunch of royalty payments for US Taco Bell shops, an example of a non-loan securitisation deal. On the desks, these are labelled 'esoteric' deals.
More globally, if a securitised product is about generating cashflow only, then why are loans the only products to be securitised? Everyone has heard of RMBS, CMBS and ABS more generally, but what about securitising things such as toll roads, city Metro & underground rail systems & asset leasing (such as rental cars from the manufacturers & aircraft from Boeing & Airbus)? They all generate reliable cashflow & so could all be securitised, am I right?
If I am right, what stops us from seeing such deals rolling out of investment banks over the coming few years? Especially as it doesn't seem as though rates are headed higher any time soon, fuelling the search for yield.
Also - side note - can someone explain why, as a lender, I would wish to sell securities against my loan portfolio? Imagine I'm a big UK housing mortgage company. I have 1,000,000 loans on my book. Why would I hire an investment bank to securitise them for me?
Thank you!
Everything you mentioned can be (and regularly is) securitized. However by nature anything esoteric tends to be way less fungible and thus less liquid than say mortgages, so that's why for instance there isn't a TBA market for oil well securitizations. Most of the dealmaking happens between sophisticated sellers and buyers. To your last point, most lenders don't want to deal with the complicated structuring and selling and underwriting that is involved in packaging a securitization. They want the loans off their books, and the Ibank structuring desk takes it from there.
About my last point, I didn't mean "why investment banks?", but rather why would a mortgage house wish to get the loans off their books? Why not just keep their capital locked up in the mortgages & earn x% per year for the next 30 years?
One major reason is exactly as you just said, so they don't have their capital locked up. And when you have a continuous flow of mortgages being originated, you can almost completely de-risk while still making good returns by selling them to ibanks to securitize so no reason to keep that risk while taking on marginally higher returns by keeping the original mortgages on the books.
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in effect, toll roads and other otherwise esoteric items are securitized by being funded by debt in the form of revenue bonds, paid directly by their realized revenues
Totally right. In this context securitization and monetization are really similar. On the project finance side (roads, private infra, energy, etc) this typically means of financing a project are through borrowing against those future cash flows but not pre-selling them.
"More globally, if a securitised product is about generating cashflow only, then why are loans the only products to be securitised?"
This is not true, loans leases, franchise fees, floorplans, reverse mortgages, insurance premiums, taxes, litigation settlements, etc are securitized.
At a high level, these are some things that an originator or seller of the assets must have answers to/checklist of things before securitizing something:
An investment bank will help the originator/seller of the assets get the story straight to address the checklist. Their goal is to make investors comfortable with investing in the bonds backed by the assets, while getting the issuer the lowest cost of funds as possible (meaning lowest coupons on the bonds).
They also walk the originator/seller through the rating agency process. Many investors will not or cannot buy bonds unless they have a certain rating (ex: a pension fund may only be allowed to buy Aa rated bonds). In order to improve marketability of the bonds, the investment bank will have to understand the methodologies of the rating agencies for the asset to be securitized, and create a final structure that will get a rating that will make the bonds marketable. This process is challenging as the rating agency methodologies aren't too transparent, and the rating agencies generally assume a worse case scenario in a deal (ex: originator/servicer goes under). Rating agencies scrutinize everything from legal docs to pool performance.
As you can tell, the rating agency process can be a bit difficult and why this is another area where the investment bank offers value.
Thank you very much all! Much appreciated!
Anything can be securitised. Did a post-graduate thesis on securitisation of pharmaceutical royalty stream which is done in small scale. The answer to this and other categories is often because investors are too risk-averse for some product categories, too much capital would be needed and due diligence would be a huge task.
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Look up what happened to English football club Leeds United. I believe they securitized their ticket sales and used the proceeds to go out and buy star players. The thinking was that they would win the Premier League and qualify for the Champions League every year and would be able to sell more tickets at higher prices. Fast forward and the club failed to deliver and has languished in the lower divisions saddled with debt. All those star players bailed for better clubs (and wages) of course!
Bro have you never seen any of the classic movies about wall street?
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