Securitization: formula sheet

Key formulas

Amount raised by originator

Cash received = Issue proceeds of securities − Issue and structuring costs

If the pool is sold at a discount or premium to book value, the difference is the gain or loss on sale.

Gain or loss on sale of pool

Gain or (loss) = Sale consideration − Book value of the pool sold

Use outstanding principal as book value unless the question gives another figure.

Pass-through cash flow to investors

Investor receipt = Collections from pool − Servicing fee − Other SPV expenses

Collections include interest and principal; any prepayment goes to investors as extra principal.

Excess spread

Excess spread = Pool interest income − Investor coupon − Servicing and other costs

It is a first cushion against losses and acts as a credit enhancement.

Flow of funds at set-up

Investors → SPV (issue price) → Originator (purchase price of pool)

The SPV funds its purchase from the securities it issues.

Flow of collections

Obligors → Servicer → SPV/Trustee → Investors

Servicer fee and other expenses are deducted before investors are paid.

Investor cash available

Collections (principal + interest) − servicer fee − trustee and other expenses

Use this to check what is distributable in a numerical question.

Pass-through cash flow to investors

Investor payment = Interest collected + Principal collected (incl. prepayments) − Servicing fee

Collections go straight to certificate holders. Timing follows the pool.

Over-collateralisation

Over-collateralisation = Pool value − Face value of securities issued

As % = (Pool value − Securities issued) ÷ Securities issued × 100 when measured on securities issued. You may also show it as a % of the pool. State the base you use explicitly in your working.

Credit enhancement cover

Cover for senior tranche = (Pool value − Senior tranche) ÷ Pool value

The amount of pool value below the senior tranche is the cushion. It includes the junior tranche and any retained first-loss or over-collateralisation piece. A separately funded cash reserve, whether funded by the originator or from collections, is additional support, so add it only if the question treats it as part of the cushion. The order in which losses are absorbed depends on the deal terms.

Excess spread

Excess spread = Pool yield − (Investor coupon + Servicing fee + Losses)

The balance acts as the first line of loss absorption, if retained in the structure.

Core comparison rule

PTC: ownership of pool, single class, no reinvestment. Pay-through: debt of SPV, tranching possible, reinvestment possible.

Use this as the answer frame for differences.

Interest on pool in a period

Interest = Opening outstanding principal × Interest rate

Use the opening balance of that period. Principal repaid reduces the base for the next period.

Pool cash flow for a period

Collection = Principal repaid + Interest collected

Deduct servicing fee or SPV expenses only if the question says they come out of the collections.

Equal instalment on a loan pool

Instalment = P × r ÷ [1 − (1 + r)^(−n)]

Use when the pool is repaid in equal instalments. Interest each period is opening balance × r; principal is instalment minus interest.

Price of a PTC

Price = Σ [Cash flow to investors in year t ÷ (1 + y)^t]

y is the investors' required yield. Pass-through cash flows are the ones actually paid to investors.

Premium or discount

Premium (Discount) = Issue price − Face value of PTC

Positive means premium. Negative means discount.

SPV profit

SPV profit = Proceeds from PTCs − Price paid to originator − SPV expenses

If all collections are passed to investors, the SPV's profit comes only from this gap.

Spread on a pool

Spread = Pool interest rate − PTC coupon rate − Servicing and other costs (as % of pool)

Use when the SPV or originator keeps the excess interest.

Originator's cost of funds

Net cash received today = Σ [Cash paid out in year t ÷ (1 + r)^t]; solve for r

Solve by trial and interpolation. Include any fees the originator pays or any amount it keeps back.

Quick revision

• Securitization turns illiquid receivables into tradable securities backed by the pool's cash flows.
• The originator sells the pool to an SPV, which issues securities to investors.
• The SPV is kept separate so investors depend on the pool and not on the originator's other business.
• Investors are paid from collections on the pool, not from the originator's general funds.
• Know every party and its role: originator, SPV, investors, servicer, trustee and others in the structure.
• Be able to describe the process in steps, from pool selection to payment of investors.
• Know the main instrument types and what backs each one.
• Credit enhancement improves the credit quality of the securities so they can attract investors.
• Distinguish enhancement given by the originator from enhancement given by outside parties.
• In numericals, find the pool cash flows first and then discount or compute as the question asks.
• Check that totals reconcile: cash collected, amounts paid to investors and any retained portion.
• Be ready to state benefits and risks for both the originator and the investor.

Common mistakes

• Treating securitization as the originator borrowing against its assets. Fix: State that it is a sale of assets to an SPV. Investors depend on pool collections, not on the originator's general credit.
• Saying the SPV is the same as the originator or a subsidiary that shares its risks. Fix: Describe the SPV as a separate, bankruptcy-remote entity created only to hold the pool and issue securities.
• Confusing the originator with the SPV. Fix: The originator sells the pool. The SPV buys it and issues securities. They are separate entities.
• Treating the obligor as the investor. Fix: The obligor pays the loan. The investor receives cash from the securities. Money moves from obligor to investor.
• Saying pay-through certificates are the same as pass-through certificates. Fix: Remember ownership versus debt. Pass-through is ownership of the pool. Pay-through is debt secured on the pool, often tranched.
• Treating ABS and MBS as different structures like pass-through and pay-through. Fix: ABS and MBS describe the underlying assets. Either can be issued as pass-through or pay-through.
• Charging interest on the original pool every year instead of on the outstanding balance. Fix: Always compute interest as opening balance × rate. Update the balance after each repayment.
• Discounting at the pool's interest rate instead of the investors' required yield. Fix: The pool rate builds the cash flows. The investor yield discounts them. Underline both in the question.

Exam tips

• Draw a small flow diagram of originator, SPV, investors and servicer. It earns marks quickly in a descriptive answer.
• In case-scenario MCQs, look for key words: true sale, pool, SPV, pass-through. They tell you which element the question tests.
• Answer 'benefits' questions in two lists, originator and investor, and keep each point to one line.
• In numericals, show the gain or loss on sale and the costs separately. Marks are given for each step.
• Learn the process first. Parties and credit enhancement come in the next topics and add depth to your answer.
• Draw a small boxes-and-arrows diagram in written answers. It earns marks quickly and shows both flows.
• In case MCQs, match the verb to the party: collects is servicer, rates is rating agency, owes is obligor, issues securities is SPV.
• Remember the originator can also be the servicer. Do not say it cannot.