Liability refers to the obligation to repay a debt. In a securitisation transaction, the special purpose vehicle (SPV) is the issuer of the securities and it is the entity that has the liability to repay the debt.
The liability of the SPV is backed by the underlying assets. This means that if the underlying assets do not generate enough cash flow to repay the debt, then the investors in the securitisation will suffer losses.
There are a number of different types of liabilities that can be used in securitisation transactions, including:
- Mortgage-backed securities: Mortgage-backed securities are securities that are backed by a pool of mortgages. The payments from the mortgages are used to repay the debt on the securities.
- Asset-backed securities: Asset-backed securities are securities that are backed by a pool of assets other than mortgages. The payments from the assets are used to repay the debt on the securities.
- Collateralized debt obligations: Collateralized debt obligations (CDOs) are securities that are backed by a pool of debt securities. The payments from the debt securities are used to repay the debt on the CDOs.
The liability of the SPV is an important part of any securitisation transaction. It is the obligation that the investors in the securitisation have to repay the debt. The type of liability that is used in a securitisation transaction will depend on the underlying assets and the risk profile of the transaction.
Here are some of the applications of liabilities in securitisation:
- To raise capital: Securitisation transactions can be used to raise capital for the originator of the underlying assets. This capital can be used to fund new lending or to acquire existing assets.
- To reduce risk: Securitisation transactions can be used to reduce the risk of the underlying assets. This is because the securities issued in the securitisation transaction will be backed by a pool of assets, which will help to spread the risk.
- To improve liquidity: Securitisation transactions can be used to improve the liquidity of the underlying assets. This is because the securities issued in the securitisation transaction will be traded on secondary markets, which will make it easier for investors to buy and sell them.