The Region

A Simplified Example of Small Business Loan Securitization

Diagram

Published September 1, 1995  |  September 1995 issue

Originator of Small Business Loans
1.

Loans
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Cash
4.

Rating
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Special Purpose Vehicle
Losses up to agreed level Arrow pointing right
3.
Rating Agency
Credit Enhancement

Securities
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Cash
Investors
2.

  1. The small business loans are transferred by the originator, such as a bank, to a legal entity generically called a "Special Purpose Vehicle" (SPV). The SPV structure provides the investor with protection if the originator of the loan becomes bankrupt and makes it easier for the originator of the loan to classify the transfer of assets as a sale.

  2. The SPV issues securities whose principal and interest will be paid with the cash flows generated by the loans. The SPV passes the ash paid by the investors to the originator.

  3. These securitizations would make use of a "credit enhancement." While these structures can take many forms, their common intent is to limit the losses that the investor bears from the purchase of the securities.

  4. Rating agencies assess the credit risk posed by the securities and provide these credit ratings to investors.

Return to "Will the Securitization Revolution Spread?"

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