Understanding Asset-Backed Securities (ABS)

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U N D E R STA N D I N G ( A B S )

ASSET-BACKED SECURITIES

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UNDERSTANDING ASSET-BACKED SECURITIES

Asset-backed securities, also known as ABS, are notes or bonds that have the backing of financial assets other than mortgage loans.

Some of these assets include auto loans,

finance companies, credit card providers) and

home-equity loans and credit card receivables.

for which they collect principal and interest

The institutions that come up with these loans

payments. Issuers purchase these loans throu-

use a process called securitization to turn

gh special-purpose vehicles and pool them

them into marketable securities.

to create marketable products for investors.

Three parties play a role in making asset-backed securities a reality: a seller, an issuer and an investor. Sellers are the companies from whom the loans originate (banks, auto

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Investors of ABS tend to be institutional investors who use these products to diversify their portfolios or gain better returns than government bonds.

TO THE ISSUERS, ABS ENABLES THE GENERATION OF MORE CASH

that can be used for lending, while investors have a wider variety of products to consider. Issuers can get creative with the underlying assets, even using cash flows from royalty payments and movie revenues. For the sellers, asset-backed securities can be removed from the balance sheet, allowing them to get more funding.

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