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Asset Backed Securitization – From Traditional to Non-traditional Asset Backed Securitization

Published on April 13, 2018 by Ambadas Yemul

The term asset-backed securities (ABS) did not exist until 1985, when Sperry Lease Finance Corporation created securities backed by its computer equipment leases. Almost 15 years later, the first mortgage-backed security was issued.

ABS are bonds or notes backed by financial assets. Typically, these assets consist of receivables other than mortgages such as auto loans, credit card receivables, student loans, and home equity contracts. Just as the ABS market has grown, so also have complexities related to ABS. ABS are considered the most exotic investment options, as new types of underlying assets are emerging regularly.

The first US ABS index was created in 1992, with the asset class added to the US Aggregate Bond Index. ABS contribute around 7% to the US Aggregate Bond Index.

Until 1997, ABS were limited to traditional collaterals such as home equity, credit card receivables, student loans, and aircraft and equipment leases. Asset Backed Securitization market makers have always been hunting for new types of assets with high-yield potential. Nobody would have thought that even intangible assets, including royalties and intellectual properties, could be used as collateral for ABS. The first issuance of bonds backed by future royalty payments concerned all pre-1990 songs of David Bowie (named Bowie Bonds), which soon became very popular among investors, especially insurance companies, which bought these bonds and held them until maturity (lasting 10 years). The total size of the issuance, rated Aaa by Moody's Analytics, was USD55m.

In 2012, Global Tower Partners – a subsidiary of Sydney-based investment bank Macquarie – issued its first ABS, backed by Cell Towers. Soon after, other players (such as American Tower Corporation and SBA Tower Trust) started issuing Cell Tower-backed securities. These, too, became popular.

Encouraged by the overwhelming response to nontraditional or unconventional ABS, Solar City – a subsidiary of Tesla Motors – introduced a new product in 2014, called Solar ABS. Solar projects are assets providing a relatively stable income over their life. In 2017, the combined ABS solar loans, leases, and power purchase agreements crossed USD1bn.

Nobody can stop ABS market makers from introducing new exotic and unconventional ABS. The most recent trend in the asset backed securitization space is that these securities are being tied to more exotic assets including entertainment-related, mutual fund fees, health-care receivables, tobacco settlements, catastrophic risks, and even the construction of sports facilities. Looking at these nontraditional and unconventional ABS, we should not be surprised if someone comes up with an ABS backed by copyright and income from the distribution of big-banner movies.


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About the Author

Ambadas Yemul has over 12 years of experience in guideline monitoring. His expertise includes guideline interpretation, rules coding, list update & post trade monitoring with a good knowledge of UCITS, 1940 Acts & ERISA regulations. Ambadas holds a Master of Business Administration (MBA) from Shivaji University.

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