Asset-Backed Securities (ABS) are created through a process of securitization, where various types of non-mortgage debt are aggregated into a single pool and used as collateral to issue new, tradable securities. Common underlying assets include auto loans, credit card balances, student loans, and commercial equipment leases. By bundling these individual obligations, issuers can convert localized, illiquid lending activities into standardized investments available to global capital markets.
These securities are typically structured into multiple tranches, or slices, each with a different level of risk and priority of repayment. The most senior tranches are paid first and receive the highest credit ratings, while subordinated tranches carry higher risk but offer higher potential yields. This structuring allows issuers to tailor the investment profiles to meet the specific risk appetites of different institutional investors.
Clients incorporate ABS into their portfolios to achieve diversification away from traditional corporate or government bonds. They offer exposure to consumer credit trends and specialized commercial financing, often providing a steady stream of amortizing cash flows.
These securities are typically structured into multiple tranches, or slices, each with a different level of risk and priority of repayment. The most senior tranches are paid first and receive the highest credit ratings, while subordinated tranches carry higher risk but offer higher potential yields. This structuring allows issuers to tailor the investment profiles to meet the specific risk appetites of different institutional investors.
Clients incorporate ABS into their portfolios to achieve diversification away from traditional corporate or government bonds. They offer exposure to consumer credit trends and specialized commercial financing, often providing a steady stream of amortizing cash flows.