Asset Backed Securities: a practical guide for investors.

This guide is an introduction to ABS, presented from the point of view of the investor. It proposes a breakdown in simple notions, which enable a partial reading.

I. What is an ABS?

ABS (Asset Backed Securities) are experiencing strong growth on the capital markets. These financial instruments enable companies to raise capital using the securitisation method described below.

1. Securitisation

Securitisation is a way for companies to raise capital and consists in using one of the company's financial assets to guarantee a security issued on the capital markets.

Let us take the example of an industrial manufacturer with an average credit rating, who is experiencing difficulties in obtaining financing from banks. This manufacturer has sold capital goods to customers with a strong credit rating. The idea behind securitisation is to structure a financing package backed by these high quality trade account receivables. In this way repayment no longer depends on the manufacturer, but only on the customers' ability to pay for the goods.

A company is created for this purpose (SPV or Special Purpose Vehicle). The manufacturer (the Seller) sells the portfolio of trade account receivables (the underlying asset) to the SPV. The SPV then refinances this purchase by issuing rated securities, with repayment of these debts depending on the customers' (the final debtors') ability to pay.