Market value decline is the decrease in the value of the underlying assets in a securitisation transaction. This can occur for a number of reasons, such as a decline in the credit quality of the underlying assets, a change in interest rates, or a change in the economic environment.
Market value decline can have a number of implications for securitisation transactions, including:
- Decreased credit ratings: The credit ratings of the securities issued in a securitisation transaction can be downgraded if the market value of the underlying assets declines. This can make it more difficult for the issuer to sell the securities and can also increase the cost of borrowing for the issuer.
- Increased losses: If the market value of the underlying assets declines significantly, the issuer may be required to make payments to the investors even if the underlying assets do not default. This is because the issuer is required to make payments to the investors based on the market value of the underlying assets, not the face value of the securities.
- Liquidity problems: If the market value of the underlying assets declines significantly, it can be difficult for the issuer to sell the securities in the secondary market. This can lead to liquidity problems for the issuer and can also make it difficult for investors to sell their securities.
Market value decline is a risk that is inherent in all securitisation transactions. However, there are a number of steps that can be taken to mitigate this risk, such as:
- Selecting high-quality underlying assets: The issuer should select high-quality underlying assets that are less likely to decline in value.
- Using credit enhancement: Credit enhancement can help to protect investors from losses in the event of a market value decline.
- Managing interest rate risk: The issuer should manage interest rate risk by hedging the interest rate exposure of the securitisation transaction.
- Monitoring the market value of the underlying assets: The issuer should monitor the market value of the underlying assets on a regular basis and take steps to mitigate any risks that are identified.
By taking these steps, the issuer can help to mitigate the risk of market value decline and protect the interests of the investors.
Here are some of the benefits of mitigating market value decline in securitisation transactions:
- Reduced risk: Mitigating market value decline can help to reduce risk for the issuer and the investors. This is because it can help to protect the value of the underlying assets and the securities issued in the securitisation transaction.
- Improved liquidity: Mitigating market value decline can help to improve liquidity for the securities issued in the securitisation transaction. This is because it can make the securities more attractive to investors and can also make it easier for the issuer to sell the securities in the secondary market.
- Increased investor confidence: Mitigating market value decline can help to increase investor confidence in the securitisation transaction. This is because it can show that the issuer is taking steps to protect the value of the underlying assets and the securities issued in the securitisation transaction.
Overall, mitigating market value decline can be a valuable tool for securitisation transactions. It can help to reduce risk, improve liquidity, and increase investor confidence.