Pass-through refers to a type of securitisation structure in which the investors receive the cash flows from the underlying assets directly. This means that the investors do not have any recourse to the originator or other parties in the securitisation structure.
Pass-through securitisations are typically used for securitising assets that generate regular cash flows, such as mortgages, credit card receivables, and auto loans.
Here are some of the applications of pass-through securitisations:
- Raising capital: Pass-through securitisations can be used to raise capital for businesses and other entities. This is because the securitised debt can be sold to investors, who are essentially lending money to the business or entity.
- Transferring credit risk: Pass-through securitisations can be used to transfer credit risk to investors. This is because the investors who purchase the securities are essentially lending money to the borrowers, and they are exposed to the credit risk of the borrowers.
- Creating liquidity: Pass-through securitisations can be used to create liquidity in the market for the underlying assets. This is because the securitised debt can be traded in the secondary market, which allows investors to sell their securities if they need to.
Here are some of the benefits of pass-through securitisations:
- Simple structure: Pass-through securitisations have a simple structure, which makes them easy to understand and manage.
- Transparent cash flows: The cash flows from the underlying assets are passed through to the investors, which makes it easy to track the performance of the securitisation.
- Low cost: Pass-through securitisations are typically relatively low-cost, which makes them attractive to investors.
Here are some of the risks of pass-through securitisations:
- Credit risk: The investors in a pass-through securitisation are exposed to the credit risk of the underlying assets. If the borrowers default on their loans, the investors will not receive their payments.
- Market risk: The value of a pass-through securitisation can be affected by changes in market conditions, such as interest rates.
- Liquidity risk: There may be limited liquidity in the secondary market for pass-through securitisations, which could make it difficult for investors to sell their securities if they need to.