Introduction

The creation and sale of asset-backed securities (ABS) is an established practice of financial management. It offers benefits to all participants. The original lender (originator) can sell the loans made to the original borrowers although they are correctly qualified as ‘imperfectly marketable assets’. In a normal sale the information asymmetry between the selling bank, who knows the borrower, and the acquiring institution, who does not know her that well, will result in a considerable discount from the nominal value of the loan. This outcome is avoided by the securitization procedure. The claims (assets) are collected in a pool, held by an independent and bankruptcy-remote ‘special purpose vehicle’ (SPV), which is often organized in the form of a trust. The SPV issues debt instruments – notes or commercial paper (CP) or bonds – to the public, mostly to institutional investors. Their information problems as to the credit or default risk affecting the pooled assets are greatly reduced by the analysis and the evaluation of the pool by a credit rating agency (CRA). In many transactions the rating is improved by the ‘credit enhancement’ (CE) provided by the arranger of the programme or by the arranger's bank; this is a guarantee that a set percentage of the losses generated by defaulting assets will be borne by the arranger or the bank.