1. Asset Backed Finance
Presented By:
Chudamani Chapagain
Roll No-07
MBA 3rd Semester

2. Asset backed Finance
• Asset – backed financing uses assets as direct security.
• ABS are bonds or notes backed by financial assets , usually consists of
receivables other than mortgage loans.
• An asset-backed security is a security whose income payments and hence
value is derived from and collateralized by a specified pool of
underlying assets
• The pool of assets is typically a group of small and illiquid assets which are
unable to be sold individually and include common payments from credit
cards, auto loans, and mortgage loans, royalty payments.

3. • Pooling the assets into financial instruments allows them to be sold to
general investors, a process called securitization, and allows the risk of
investing in the underlying assets to be diversified because each security will
represent a fraction of the total value of the diverse pool of underlying
assets.
• ABS derive their cash flows from a pool of underlying assets
MBS = mortgage backed securities
CARS = certificates for automobile receivables
CARDS = certificates for amortizing revolving debts
HELS = home equity loan securities

4. Asset-Backed Securities
• The underlying assets generate cash flows of principal
and interest which can be repackaged and sold to
investors.
Principal
Interest
Asset-backed
securities
Fixed income
assets

5. Securitization
• In ABS, the underlying assets are collected into a pool .
• Financial institutions sell the pool of assets to special-purpose
vehicle (SPV).
• SPV buy such assets in order to securitize them, again
sells them to a trust.
• The trust repackages the loans as interest-bearing
securities and issues them.

6. Benefits of Investing in ABS
Attractive yields
High credit quality
Diversity and investment diversification
Predictable cash flow
Reduced Event Risk

7. Types of Assets that back ABS
However the assets are classified into four types ,the ways to
classify the securitized assets are classified into two types:
• Amortizing
• Nonamortizing
1. Home –equity loans(HELs):
 Largest sector of ABS market.
 Backed by closed-end home-equity loans(HELs) and open-end
loans, which are called (HELOCs)-home equity lines of credit.

8. 2.Auto Loans
• Second largest and oldest asset class in ABS market.
• 16.1% of issuance .
• Most auto ABS are supported by prime loans.
• Some auto ABS are collaterized by loans to subprime (B, C and
D borrowers).
• Loans to individual car buyers are amortizing assets.

9. 3. Credit cards
• Oldest segments of ABS market.
• 14.3% of ABS issuance .
• Holders of credit card borrow funds, generally on
unsecured basis up to an specified limit and pay the
principal and interest as they wish, as long as they make
a required minimum payment on a regular basis.
• Credit card debt has no actual maturity, so credit
cardholders do not have to pay off the principal on a
schedule date.

10. 4.Student Loans
• 8.1%of ABS issuance .
• Student loans have relatively high default rates.
• Neutralized by government guarantee programs.
• Lenders bear the risks directly.
• Student loans are amortizing loans where principal
and interest are paid off on schedule or
predetermined schedule.

11. 5. Equipment Leases
• Small portion of ABS market(1.5% of issuance ).
• Securitization of leases for computers ,telephone
systems and other kinds of business equipment .
• Leases takes in two forms- closed end and open end.
• Equipment leasees are usually corporations rather
than individuals ,that have good credit profiles.

12. Interest Rates and Yields on ABS
• Yield on ABS depends on:
 Purchase price in relation to interest rate(fixed or
floating)
 Length of time the principal is outstanding.
• Prepayment assumptions must also be taken while
determining the yield.
• New ABS yield> T.S and corporate bonds

13. • In secondary market , spread between ABS and Treasury
securities or comparable corporate bonds widen or narrow
depending on:
 Market conditions
 Direction of interest rates in economy
 No. of issues coming to market.
Average life:
• Time weighted average maturity of stream of principal
cashflows.It can be estimated for a security that pays
principal in a single payment.

14. Structure of ABS
1. Fully Amortizing:
• Reflect the full repayment of underlying loans through
scheduled interest and principal payments.
• Typically backed by HELs,auto loans, manufactured-housing
contracts and other fully amortized assets.
• Prepayment risk is key consideration however the rate
of prepayment varies as per the types of underlying
assets.

15. 2. Controlled Amortization:
• Revolving debt like credit card receivables,HELOCs,trade
receivables and some leases are securitized using this
structure.
• Provides investors with relatively predictable repayment
schedule ,eventhough underlying assets are nonamortizing
• During a revolving period, only interest payment is made,
after that principal payments made to investors in a series
of defined periodic payments, over less than a year.
• Risk inherent in this structure –early amortization event.

16. 3.Soft /Hard Bullet
• ‘Bullet' structure which are used with revolving assets are
designed to return principal to investors in a single
payment.
• ABS feature two cash flow management periods :
1. Revolving period
2. Accumulation period
soft bullet
• Bullet payment is not guaranteed on the expected
maturity date.
• Shortfall exists in accumulation period.

17. Hard Bullet:
• This bullet structure ensures that principal payment is
made on the expected maturity date with a longer
accumulation period, a third party guarantee or both.
• Rating agencies evaluate the timeliness of principal
payments.
• Hard bullet are rare because investors are satisfied or
comfortable with soft bullet and are unwilling to pay
extra for a guarantee.

18. Floaters:
• Due to floating interest rate ,a no. of issues raises behind amortizing
and nonamortizing assets.
• Rate are adjusted periodically(LIBOR +Fixed margin)
• When the underlying collateral is itself made up of floating –rate
loans-credit card index to prime rate – a floating rate coupon on ABS
can help avoid a cashflow mismatch between borrowers and
investors.
Sequential pay
• ABS are issued as an sequential pay securities.
• First tranche(one with shortest avg. life) receives all available
principal payments until it is retired; only then second tranche begin
to receive principal and so on.

19. Prepayments Models
• Constant Prepayment Rate (CPR)
• Monthly Payment Rate(MPR)
• Absolute Prepayment Speed(APS)
• Prospectus Prepayment Curve(PPC)
• Manufactured –Housing Prepayment Curve(MHP)

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