Origination refers to the process of identifying, underwriting, and assembling a pool of assets that will be securitised. The originator is the entity that originates the assets and then securitises them.
The origination process typically includes the following steps:
- Identifying assets: The originator identifies a pool of assets that are suitable for securitisation. These assets can be loans, receivables, or other financial instruments.
- Underwriting assets: The originator underwrites the assets to assess their credit quality. This involves reviewing the financial statements of the obligors on the assets and assessing their ability to repay their debts.
- Assembling a pool of assets: The originator assembles a pool of assets that have similar credit quality and risk characteristics. This is done to ensure that the securitised product is attractive to investors.
The origination process is an important part of the securitisation process because it ensures that the assets that are securitised are of high quality and that they are suitable for the type of securitisation that is being undertaken.
Here are some of the applications of origination in securitisation:
- Raising capital: Securitisation can be used to raise capital for businesses and other entities. This is because the securitised product can be sold to investors, who are essentially lending money to the business or entity.
- Transferring credit risk: Securitisation can be used to transfer credit risk to investors. This is because the investors who purchase the securities are essentially lending money to the SPV, and they are exposed to the credit risk of the assets that are held by the SPV.
- Creating liquidity: Securitisation can be used to create liquidity in the market for the underlying assets. This is because the securitised product can be traded in the secondary market, which allows investors to sell their securities if they need to.
Here are some of the risks associated with origination in securitisation:
- Credit risk: The originator is exposed to the credit risk of the assets that they originate. If the obligors on the assets default on their payments, the originator may lose money.
- Market risk: The value of the securitised product can be affected by changes in market conditions. For example, if interest rates rise, the value of securitised products that are linked to interest rates may fall.
- Liquidity risk: There may be limited liquidity in the secondary market for securitised products. This means that investors may have difficulty selling their securitised products if they need to.
Overall, origination can be a risky process, but it can also be a very profitable one. It is important for originators to carefully assess the risks involved before they originate a pool of assets.