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.