China asset-backed notes: it’s time to fly solo
Too many Chinese investors focus on the originator more than the asset pool. That undermines one of the crucial purposes of securitization.
What is securitization for?
Critics might answer that its purpose is simply to make banks money. There is a grain of truth to this, since banks wouldn’t bother with a market that offered no upside. But regular ABS issuers are stingy. There are some ancillary benefits of managing a company’s securitization, as well as the potential for profit on banks’ trading books, but securitization is hardly a big money-spinner.
The other obvious answer is that securitization is just another funding tool, offering originators an all-in cost of funding that should be at least as attractive as other financing options, if not much cheaper. Again, this is not far off but it ignores the crucial advantages for investors and originators that securitization offers.
Let’s stick with a textbook-style definition. Securitization is the process of transforming assets — anything from mortgages or auto loans to future receivables on airline tickets — into securities.
It allows investors to get direct exposure to the cash flows generated by a pool of assets, rather than taking credit risk on an individual company. This has a crucial advantage: estimating cash flows from well-defined asset pools should be much easier than figuring out likely cash flows from corporations, which tend to be well-trained in the dark arts of obfuscation and puffery.