23 Jan 2023
This article aims to provide you with a general understanding about securitised credit. While securitised credit may be a beneficial addition to your portfolio under certain circumstances, you should not rely solely upon this article to make investment decisions.
Securitised credit is an asset class which consists of bonds or instruments that comprise cash-generating assets such as residential and commercial mortgage loans, auto loans, credit card loans, etc. These illiquid assets are purchased and restructured into various tranches through the securitisation process.
The differences between securitised credit and bonds
Source: HSBC Asset Management, June 2022. For illustrative purpose only, with all other factors assumed to be equal.
A group of assets is purchased and transformed into securitised credit by a Special Purpose Vehicle (SPV) which is a separate company of a financial institution with its own balance sheet. It bears the obligations and liabilities of such loans and gets financing by grouping these loans into different tranches based on their characteristics such as maturity, credit ratings, etc.. Senior tranches typically have higher credit ratings due to their payment priority.
Yield pick-up: securitised credit can offer a yield premium compared to traditional bond instruments.
Floating rate exposure: securitised credit, which is largely a floating rate, offers a spread above a short-term reference interest rate. The yield usually follows the moves in interest rates. As interest rates rise, the total return from the coupons will also increase.
Credit enhancement: provides a cushion against collateral losses via features such as tighter convenants, overcollateralisation1Footnote link 1, etc.
Diversification benefits: it has low correlation to other bonds and can increase portfolio diversification within the bond allocation.
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