I am interested in the securitazion process and am looking for useful examples to help me understand how it can be applied in practice.

Assuming I have a loan portfolio consisting of secured* and unsecured loans. The loans are further assigned a (internally assigned) risk rating. The loan payments are in a local currency.

Assuming I want to securitize this loan portfolio into tranches identified by:

  • secured/unsecured
  • risk rating
  • currency exposure hedged* (or not)

My question is

How would I go about securitizing my existing loan portfolio into the tranches described above? What are the required steps?

Could anyone recommend an spreadsheet template online that I can use as a starting point for this exercise?

[[ Notes ]]

  1. The collateral backing the secured loans fall into two categories: moveable and immovable assets

  2. For the sake of simplicity/familiarity etc. assume that the currency hedging is done against the USD.

  • $\begingroup$ You never described the tranches, nobody will be able to give you a decent answer until you do. $\endgroup$
    – jeff m
    Dec 4, 2013 at 21:47
  • $\begingroup$ @jeffm: Not sure I understand your comment. I already stated that the loan book will be "sliced up" (i.e. diced into tranches) using the three 'attributes' I mentioned in my question. Is there some relevant information you feel I am leaving out? $\endgroup$ Dec 4, 2013 at 23:52
  • $\begingroup$ Yes. Tranching isn't as simple "slicing up" assets, unless you're just asking if higher tranches in the bond are safer because they have higher ratings, better collateral, and typically larger balances. Then the answer is yes. Otherwise, are any tranches pari-passau, what kind of waterfall is there(pro-rata, straight, etc.), are they grouped, subordination levels, etc. $\endgroup$
    – jeff m
    Dec 5, 2013 at 1:49
  • $\begingroup$ @jeffm: Getting slight of my depth here .. so I'll tell you the end goal, and then hopefully, (you) or someone can tell me how to get there. Given a loan portfolio (consisting of 10ks of smaller sizee loans of different risk classes and tenors), I want to "slice" into larger issue sized bonds with predefined risk ratings and tenors. Ideally too, I'd like to hedge the interest payments against a major (say USD). My question is: what would be the steps involved in this securitization (repackaging of interest receipts)? $\endgroup$ Dec 5, 2013 at 16:11

1 Answer 1


This is going to vary country by country, since securities laws can differ quite a bit when it comes to securitizing. That is largely governed by the relevant accounting rules which outline what assets you can take off your books. Without a majority transfer of risk, the asset typically can't(and shouldn't) be securitized. Securitization is very customizable, so this is going to be pretty general.

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Tranches are going to be determined by targeting specific investors and structuring the bond to fit their needs. Deals are typically structured in a sequential paydown, where the senior tranche receives P&I until it fully amortizes. Payments flow from the top down while losses and prepayments(if possible) flow from the bottom up. Typically there is an un-rated equity tranche as the most junior piece, that the bank itself or a B-piece buyer holds to better align interests. As for the actual loans being repackaged, there's a tradeoff with quality and balance. The lower the ratio of tranche balance : collateral, the less risk, when the collateral balance is larger than the sum of the tranches, this is known as overcollateralization, which absorbs losses prior to any tranche. In the simplest case, interest payments from all of the loans flow through at the weighted average coupon(WAC) of the underlying collateral net of any fees(servicing, escrow, etc.).

Tenor is going to be determined by the underlying's loan terms. It can vary depending on what sort of prepayment and waterfall provisions exist. A pool of 7-year IO loans is obviously going to limit the maturity to somewhere in that neighborhood. Contraction/Extension risk is usually well defined by your position in the capital stack.

It sounds like you might have a mixed pool of IO and non-IO loans, which can be hedged using swaps. The closer you move towards an IO structure, extension risk is going to increase and the bond is going to price closer to par. You can slice and group the loans into as few or as many tranches as you like, you just have to find someone willing to buy it.

  • 1
    $\begingroup$ +1 for the detailed explanation and schematic. Is there a "Securitization 101" type book you could recommend, that explains the technical, no-legal (i.e. modelling aspect) of securitization? $\endgroup$ Dec 9, 2013 at 8:42
  • $\begingroup$ Not offhand, in my opinion you're better off looking for industry primers based on the specific securitizations that have been brought to market. Just googling around for <insert i-bank in that market> clo/cmbs/etc. primer should yield some results. $\endgroup$
    – jeff m
    Dec 9, 2013 at 18:55

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