Securitization

In a tranched securitization, securities have different seniority and cash flows are allocated according to a predefined waterfall.

In a senior-subordinate structure, credit losses are generally absorbed first by the most junior tranche and reach more senior tranches only after junior protection is exhausted.

Traditional securitization generally involves selling assets to a special-purpose vehicle, while synthetic securitization transfers credit risk through credit derivatives or guarantees without necessarily transferring the underlying assets.

A bankruptcy-remote SPV is intended to separate securitized assets from the insolvency risk of the originator or other transaction participants, but the structure does not eliminate the underlying borrowers’ credit risk.

Securitization reallocates the credit risk of an underlying asset pool among originators, credit enhancers, and investors through tranches; it does not inherently eliminate that underlying credit risk.