ABS: Asset Backed Securities

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What is securitization?

Securitization is a method of financing by transferring assets. The company transfers a portfolio of assets, such as trade receivables, customer loans, to a Special Purpose Vehicle (SPV) which finance itself by issuing debt securities on the market.

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On the balance sheet of the SPV, there is only the debt on the liabilities side and the assets purchased from the original company on the assets side. This means that the debt (bonds) can only be repaid if the assets are repaid. The bonds therefore do not carry a risk on an issuer but on a portfolio of assets purchased from one (or more) companies.

What are Asset Backed Securities?

To make sure that issuers are aware that they have a risk on a portfolio of assets and not on an issuer, these debt securities are called ABS or Asset Backed Securities.
The term Asset Backed Securities describes the structure of the SPV’s balance sheet. The: assets on one side and debt securities backed by those assets on the other. The bonds are therefore backed exclusively by the underlying assets, hence the name Asset Backed Securities (ABS).

The different types of ABS

ABS is the generic term that varies according to the nature of underlying assets or the type of securities issued.
For example, when a SPV buys mortgage loans from banks, the ABS are classified as Mortgage Backed Securities (MBS), which may be Residential Mortgage Backed Securities (RMBS) or Commercial Mortgage Backed Securities (CMBS).
We also have the whole series of Collateralized Debt Obligations (CDOs), in which the SPV acquires portfolios such as corporate or consumer loans (CLO or Collateralized Loan Obligation) or bond portfolios (CBO or Collateralized Bond Obligation).