Portfolio Strategy

The ABCs of ABS

January 09, 2017

Finding value in complexity: The structure, risks, and investor-friendly features of asset-backed securities.

Asset-backed securities (ABS)—also called securitized products or structured credit—finance pools of familiar asset types, such as auto loans, aircraft leases, credit card receivables, mortgages, and business loans. In one way or another, these asset types represent contractual obligations to pay. The principal job of ABS investors is to determine value by analyzing the cash flows that result from these obligations, rather than relying solely on the value of any hard asset collateral.


Video

Securitized products

An introduction to securitized products from the leaders of our ABS group.


Report Highlights

  • Securitization begins with the creation of a special purpose vehicle that acquires a pool of assets and simultaneously issues asset-backed securities to fund the purchase of those assets.
  • The pool of securitized assets are contractual obligations to pay that are typically the same type (auto loans, aircraft leases, credit card receivables, corporate loans, etc.) but represent diverse payers.
  • With $1.3 trillion outstanding, non-mortgage ABS represents just 4 percent of the fixed-income universe.
  • ABS debt boasts investor-friendly features that may help protect against loss and improve liquidity, including bankruptcy remoteness, prioritization of payments, overcollateralization, excess spread, amortization, professional servicing, and diversity of payers within each underlying pool.
  • Despite these and other strengths, ABS have offered higher yields than similarly rated municipal or corporate bonds.
  • Securitizations fund lenders, lessors or other specialty finance companies, or provide debt capital to traditional corporate borrowers that have contracts that are considered to be of higher credit quality than the corporation’s own unsecured debt. We illustrate such a situation with a case study.
  • Successful investment in structured credit requires dedicated credit, trading, technology, and legal resources, institutional knowledge, and a disciplined investment process.
 
 

Important Notices and Disclosures

Investing involves risk, including the possible loss of principal. Investors in asset-backed securities, including mortgage-backed securities and structured finance investments, generally receive payments that are part interest and part return of principal. These payments may vary based on the rate at which the underlying borrowers pay off their loans. Some asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, causing their prices to be volatile. These instruments are particularly subject to interest rate, credit and liquidity and valuation risks.

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. This article contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author's opinions are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. ©2017, Guggenheim Partners.  



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