/perspectives/portfolio-strategy/asset-backed-securities-abs

The ABCs of Asset-Backed Securities (ABS)

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

January 09, 2017


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.
 
 

FEATURED PERSPECTIVES

February 15, 2017

Fixed-Income Outlook: Assessing Value in a Faith-Based Rally

Our first quarter 2017 report reflects expectations for strong risk-asset performance as President Trump’s economic agenda takes shape.

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10 Macro Themes to Watch in 2017

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January 13, 2017

High-Yield and Bank Loan Outlook: Focus on Floating Rate

Conditions bode well for credit, but a more aggressive Fed and geopolitics could bring volatility. 


VIDEO

Long-Term Macroeconomic Outlook 

Our Long-Term Macroeconomic Outlook

Scott Minerd, Global Chief Investment Officer, sheds light on U.S. economic strength, headwinds for the EU, and which emerging markets look attractive for long-term investors.

Strategies for a Low-Yield Environment 

Strategies for a Low-Yield Environment

Scott Minerd, Global Chief Investment Officer, and Anne Walsh, Assistant Chief Investment Officer, Fixed Income, share insights on investing in unprecedented market conditions.







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