The Market Impact of the Asset-Backed Security

Abstract

The process of securitization is something that many people are unfamiliar with. Luckily, I had the chance to learn about it through my internship with Case Credit in Racine, Wisconsin. I was hired in the information services department, specifically in the Retail Finance Group. Here, I dealt with one particular type of securitization, the asset-backed security. I quickly became familiar with the terminology of the ABS (Asset Backed Security) market. The first thing to know about securitization is that it implies something serviced by a cash flow of a pool of receivables, that convert later into cash. In working with Case Credit, I dealt with the receivables taken in on Case agricultural and construction equipment leases/loans. Case Credit takes a number of these individual loans and proceeds to package a selected few into asset-backed security notes. These notes are then offered to investment banks to purchase, giving the banks the right to all the future receivables on the loans. The difference in rate between the individual farming loan, and the security note offered to the banks, is where Case Credit makes their profit from. These transactions are public knowledge and everyone has access to information about them. There were a number of reports created to help chart the progress of these deals. I worked with the SmartStream software in creating month end reporting worksheets. The first type of worksheet I created was the cashflow analysis. This cashflow analysis was used to chart the progress of a particular census tract, which is simply a group of individual agricultural/construction loans. In this worksheet, the payments on the loans are projected out into the future for a certain number of months. This way the accounting area can see just how much money should come in at any given month for this particular census tract. The starting month, or month zero, for this report is always the last full month completed. So, if I run the report on March 3, 1997, month zero would be February 1997. There were also different times I would run the reports depending on whether it was a Canadian or United States deal. I also spent time at Case Credit working to streamline the current month end reporting process. All of the reports were currently generated with the SmartStream application, but I was working to convert them all into MicroSoft Access. The first problem was pulling all of the necessary data directly into Access from our database. But once this problem was resolved, the reports could be generated immensely faster in Access, almost cutting the reporting time in half. Through this internship I learned a lot about securitization, especially the asset-backed security. The market structure is actually quite interesting, with such things as student loans now being securitized. More and more companies are turning to asset-backed securities to clear their balance sheets. It looks as though the ABS market will only continue to grow stronger in the near future. But we cannot understand the future of this market without taking a brief look at the history of the ABS market. First, I will explain the securitization process and the history behind the asset backed security market. Then more analysis will follow dealing with various issues of the ABS process, and finally I will talk a little about my work experience, and what I feel about the future.