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For example, in the context of a loan securitization, if the SPE securitization vehicle were owned or controlled by the bank whose loans were to be secured, the SPE would be consolidated with the rest of the bank's group for regulatory, accounting, and bankruptcy purposes, which would defeat the point of the securitization.
The pools of underlying assets can vary from common payments on credit cards, auto loans, and mortgage loans, to esoteric cash flows from aircraft leases, royalty payments, or movie revenues. Often a separate institution, called a special-purpose vehicle, is created to handle the securitization of asset-backed securities. The special-purpose ...
Securitization is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans, or credit card debt obligations (or other non-debt assets which generate receivables) and selling their related cash flows to third party investors as securities, which may be described as bonds, pass-through securities, or collateralized debt ...
Orphan structure or Orphan SPV or orphaning are terms used in structured finance closely associated with creating SPVs ("Special Purpose Vehicles") for securitisation transactions where the notional equity of the SPV is deliberately handed over to an unconnected 3rd party who themselves have no control over the SPV; thus the SPV becomes an "orphan" whose equity is controlled by no one.
A bank transfers risk in its loan portfolio by entering into a default swap with a ring-fenced special purpose vehicle (SPV). The SPV buys gilts (UK government bonds). The SPV sells 4 tranches of credit linked notes with a waterfall structure whereby: Tranche D absorbs the first 25% of losses on the portfolio, and is the most risky.
Example of the secondary mortgage market. Imagine you take out a mortgage to purchase a new home. The lender gives you the funds to purchase the property, and you agree to pay the money back over ...
If the credit derivative is entered into by a financial institution or a special purpose vehicle (SPV) and payments under the credit derivative are funded using securitization techniques, such that a debt obligation is issued by the financial institution or SPV to support these obligations, this is known as a funded credit derivative.
A secured loan requires you to pledge collateral — something of value like a savings account or car. If you default, a lender can seize the collateral to satisfy the debt.