What entity determines the amount of securities needed in a securitization?

Question

What will be an ideal response?

Answer 1

Although in our simple transaction example (described earlier and mentioned in the text), Exceptional Dental Equipment, Inc. (EDE) manufactured the dental equipment and originated the loans, there is another type of securitization transaction involving another company, called
a conduit, that buys the loans and securitizes them. For example, consider a hypothetical company Dental Equipment Financing Corporation (DEFC) whose business is to provide financing to dental equipment manufacturers who want to sell their equipment on an installment basis. DEFC would then develop a relationship with manufacturers of dental equipment (such as EDE) to purchase their installment contracts. DEFC would then warehouse the installment contracts purchased until it had a sufficient amount to sell to a special purpose vehicle (SPV), which would then issue the asset-backed securities (ABS). The SPV in a securitization is referred to as the "issuer" or "trust" in the prospectus. As issuer, the SPV would be involved in determining the details of the securities needed in the securitization.

The legal implication is that when the SPV issues the ABS that are backed by the loans, investors contemplating the purchase of any bond class will evaluate the credit risk associated with collecting the payments due on the loans independent of the credit rating of EDE. The credit rating will be assigned to the different bond classes created in the securitization and will depend on how the rating agencies will evaluate the credit risk based on the collateral (i.e., the loans). In turn, this will depend on the credit enhancement for each bond class. So, due to the SPV, quality of the collateral, and credit enhancement, a corporation can raise funds via a securitization where some of the bond classes have a credit rating better than the corporation seeking to raise funds and that in the aggregate the funding cost is less than issuing corporate bonds.