What is an example of a securitization transaction?

The ABS is structured to offer varying levels of risk and return to investors, depending on factors such as the creditworthiness of the borrowers and the terms of the underlying credit card balances. This allows investors to tailor their portfolios to their specific risk tolerance and investment objectives.

Securitization is a process where a company or institution converts an illiquid asset into a tradable security. An illustrative example of securitization involves a credit card company.

The credit card company aggregates thousands of credit card balances owed by its customers, creating a large pool of assets. These balances, which would typically be considered non-tradable due to their individual nature, form the underlying assets for the securitization process.

The next step involves the credit card company selling this pool of assets to a financial institution, typically an investment bank. By doing so, the credit card company is able to free up capital that would otherwise be tied up in these long-term balances.

The investment bank, upon acquiring the pool of assets, packages them into a security that can be sold to investors. This security, often referred to as an asset-backed security (ABS), is designed to provide investors with a steady stream of income based on the interest and principal payments made by the credit card holders.