A split-loan is a type of securitisation where the underlying assets are divided into two or more tranches. This is done to create different risk profiles for investors, with the lower-risk tranche being repaid first.
Here are some of the applications of split-loan securitisation:
- To create different risk profiles for investors: By dividing the underlying assets into tranches, investors can choose the tranche that best suits their risk appetite. For example, an investor who is looking for a low-risk investment might choose the first tranche, while an investor who is looking for a higher-return investment might choose the last tranche.
- To reduce the risk of the securitisation: By dividing the underlying assets into tranches, the risk of the securitisation is reduced. This is because if one tranche defaults, the other tranches will still be repaid.
- To increase the liquidity of the securitisation: By dividing the underlying assets into tranches, the securitisation can be made more liquid. This is because investors can choose the tranche that they want to buy or sell, rather than having to buy or sell the entire securitisation.
Here are some examples of split-loan securitisation:
- Mortgage-backed securities (MBS): MBS are a type of securitisation where the underlying assets are mortgages. MBS can be split into tranches based on the credit rating of the mortgages.
- Collateralised debt obligations (CDOs): CDOs are a type of securitisation where the underlying assets are debt securities. CDOs can be split into tranches based on the credit rating of the debt securities.
- Asset-backed securities (ABS): ABS are a type of securitisation where the underlying assets are assets other than mortgages or debt securities. ABS can be split into tranches based on the risk of the assets.