An underlying security is the asset or pool of assets that is used to back the securitisation. In Australian English, an underlying security is sometimes referred to as a "underlying asset" or a "underlying collateral".
The underlying security is important in securitisation because it provides the cash flows that are used to pay the investors in the securitisation. If the underlying security defaults, the investors may lose their money.
There are a variety of different types of underlying securities that can be used in securitisation, including:
- Mortgages: Residential and commercial mortgages are commonly used in securitisation.
- Credit card receivables: Credit card receivables are another common type of underlying security.
- Auto loans: Auto loans are also a popular type of underlying security.
- Invoices: Invoices can be securitised, but this is less common.
The underlying security will be specified in the securitization documentation.
Here are some of the applications of underlying securities in securitisation:
- To provide cash flows: The underlying security provides the cash flows that are used to pay the investors in the securitisation.
- To reduce risk: The underlying security can reduce risk by providing a predictable stream of cash flows.
- To improve liquidity: The underlying security can improve liquidity by making it easier to sell the securitisation to investors.
Underlying securities are a valuable tool for securitisation. They can be used to provide cash flows, reduce risk, and improve liquidity.
An underlying security is sometimes referred to as a "underlying asset" or a "underlying collateral".