Thursday, May 7, 2009

Rating Securitizations (1)

the securities created have to be sold to investors and they will generally want the comfort of credit rating by at least one of the major rating agencies.
the structure of most securitizations involves the establishment of new special purpose vehicle (SPV) that sells the securities and applies the proceeds to acquiring a pool of assets; say a package of mortgage loans. The amounts received from the mortgage loans are passed on to the securities holders as principle and interest.
The rating agencies will want to be happy with the following:
* that there has been a true sale of the assets to the SPV and that all the legalities needed for it to obtain unequivocal access to the cashflows from the underlying assets have been completed.
* that the underlying assets being securitized are of sufficient quantum and quality to ensure that the securities holders will be satisfied. this will involve looking at asset default rates and their timing pattern as it relates to the transaction; delinquency rates and delays in realizing recoveries are all estimated .

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