What is securitisation?

The originator selects a pool of similar assets such as home loans, car loans or trade receivables and compiles loan-level data for investor due diligence. The pool is sold to a bankruptcy-remote special purpose vehicle (SPV); that legal separation, the 'true sale', protects investors if the originator becomes insolvent. In a synthetic deal the assets stay on the originator's balance sheet and only the credit risk is transferred.

The SPV issues notes in tranches and a cashflow waterfall pays senior notes first, then mezzanine, then equity, with triggers that divert cash to reserve accounts if performance slips. Rating agencies assess each tranche before the notes are sold, and a servicer, often the originator, keeps collecting repayments and managing arrears. Many originators first build the pool in a bank-funded warehouse facility, then move it into an SPV once it is large and seasoned enough for term issuance.

Several parties share the work. The originator sources the assets and usually keeps servicing them. The SPV holds the assets and issues the notes. A trustee protects investors, enforces the security and monitors compliance with covenants.

The servicer collects payments and handles defaults and recoveries, and a paying agent or registrar handles distributions and record-keeping. Rating agencies give credit opinions on each tranche, which shape pricing and which investors can buy. Investors range from those buying highly rated senior notes to those taking unrated equity. Warehouse lenders and liquidity providers supply interim funding while the pool is being built.

For originators, securitisation diversifies funding beyond deposits and wholesale lines, turns illiquid receivables into cash, and can free up balance sheet and regulatory capital when risk is transferred cleanly. That is how many non-bank and specialist lenders scale their lending. For investors, tranching means they can pick the credit exposure and return that suit them, and diversify into specific collateral types.

The risks sit on both sides. Borrower defaults, faster or slower prepayments, weak servicing and imperfect legal isolation of the assets can all reduce the cash reaching investors. Structures manage these through subordination, reserve accounts, servicer covenants, backup servicers and true-sale legal opinions.

In Australia, APRA's Prudential Standard APS 120 Securitisation sets the requirements for banks and other ADIs, with Prudential Practice Guide APG 120 the accompanying guidance on governance, due diligence and disclosure. Non-bank originators are not APRA-regulated, though warehouse banks pass equivalent expectations through their facility terms. ASIC focuses on disclosure adequacy. Accounting (whether assets are derecognised or the SPV consolidated) and tax treatment need specialist advice.