Asset Classes

In the normal case of a receivable Securitisation the security for the transaction are the securitised assets themselves, i.e. the receivables. This is possible, because usually the underlying pool of debtors is very large and the debtors are

113 Cf. Kendall (2000), p. 1.

114 Cf. Kürn (1997), p. 17.

115 The term Asset-Backed Securities (ABS) also functions as a generic term for all kinds of Asset-Securitisations. Cf. Kendall (2000), p. 2.

116 Cf. Büttner (1999), p. 24.

117 Cf. Bigus (2000), p. 465.

118 Cf. Hug (2000), p. 57.

spread over various industries and regions. Consequently the probability of default is very low. However, in transactions that involve future cash flows such future lease receivables, that result out of contractual relationships with a higher degree of uncertainty and therefore higher default risk, additional collateral is required. On the loan Securitisation side, there can either be Securitisations of unsecured corporate loans (e.g. Collateralised Debt Obligations), where the credit of the borrowers, the loan agreements and the pooling diversification effectively function as the security for the investors, or there can be Securitisations of secured loans (e.g. Mortgage-Backed Securities), where the assets (the interest and principle of loans) are enhanced by additional collateral, such as a mortgage.

Asset-Backed Securities

The term Asset-Backed Securities (ABS) comprises securities and certificates of indebtedness representing payment claims against a special purpose vehicle (SPV) established solely for the purposes of the ABS-transaction. The payment claims are ‘backed’ by a pool of ‘assets’, which are transferred to the special purpose vehicle and serve as security, largely for the benefit of the ABS-Investors.¹¹⁹

A comprehensive global definition for asset classes within the universe of Asset-Securitisation does not exist. There are three different main asset classes observable within Asset-Securitisation. Until now it is mainly Mortgage-Backed Securities (MBS), Collateralised Debt Obligations (CDO) and Asset-Backed Securities in the narrower sense (ABS i.n.S.). However, but as the Securitisation market is mainly driven by innovation of new Asset-Securitisations, the universe of asset classes is further expanding. The reason why it is defined as ABS i.n.S. is that the term Asset-Backed Security in Europe also functions as the generic term for all kinds of Asset-Securitisations. The asset classes shown below subdivide themselves into further sub-asset classes: Commercial MBS (CMBS), Residential MBS (RMBS), Collateralised

119 Cf. Gehring (1999), p. 1.

Loan Obligations (CLO), Collateralised Bond Obligations (CBO) and other types of ABS that are backed by a range of different receivables as shown below.¹²⁰ Mortgage-Backed Securities

Mortgage-Backed Securities (MBS) are mainly bank-originated securities that are backed by a pool of either residential or commercial mortgage loans. These securities therefore represent payment claims against an SPV that are backed by a pool of secured loans, i.e. mortgages that comprise cash flows from real estate loans. In short these securities represent derivative real estate cash flows.¹²¹

Commercial Mortgage-Backed Securities

Commercial Mortgage-Backed Securities (CMBS) are securities that are backed by one or more pools of mortgage loans. CMBS are backed by loans secured by commercial properties, which may include multifamily housing complexes, shopping centres, industrial parks, office buildings, and hotels.¹²²

Commercial Mortgage-Backed Securities are mainly bank-originated securities that represent payment claims against an SPV that are backed by a pool of secured loans, i.e. mortgages that comprise cash flows from real estate loans.¹²³ In short these securities represent derivative real estate cash flows originated by banking institutions, whereas Real Estate Asset-Backed Securities represent original cash flows originated by non-banks, i.e.

Corporates and Governments. This is explained in the next part.

120 Cf. Skelton and Dornhofer (2004), p. 1; Taylor (2004), p. 2; Vrensen and Toft (2004), p. 3.

121 Cf. Herrmann (2002), p. 175.

122 Cf. Standard & Poor's (2003), p. 7.

123 Cf. DeMichele and Adams (1999), p. 73.

Figure 8: Differentiation of Asset-Classes with in Asset-Securitisation in Europe¹²⁴ Source: Authors Compilation

124 Cf. Seymour (2004a), p. 1.

Asset-Securitisation / Asset-Backed Securities CDOMBSABS i.n.S. CLOCBORMBSCMBS LeasesConsumer LoansTrade ReceivablesFuture ReceivablesAutomobileWhole CompanyCredit Cards

Real Estate Securitisation

Broadly, any asset, which produces a predictable and dependable income stream or receivable, can be securitised. Because income will be required to service interest payments due on the securities, the existence of a steady or predictable income stream is a fundamental requirement. This holds true for real estate.¹²⁵

However, until now Real Estate Securitisation is not considered to be a part of the Asset-Securitisation universe. While there is no common and recognized definition of Real Estate or Property Securitisation,¹²⁶ the underlying dissertation defines it as the Securitisation of real estate assets, i.e. real property or real estate receivables. Real Estate Securitisation comprises of the Securitisation of current and future real estate cash flows and receivables, as well as the Securitisation of property values (e.g. in the form of the real estate itself). The securities that represent the claims against the SPV that holds the real estate assets are referred to as Real Estate Asset-Backed Securities (RE ABS).¹²⁷

In short Real Estate Securitisation describes the financing of property through the Securitisation of real estate cash flows and property values without the bank as a lending intermediary. However, the bank will take part in the transaction, not as the lending institution, but as the arranger of the financing. Therefore the bank is not going to commit valuable equity. It will only earn the structuring fees.

In this constellation the lending spread can be distributed between the originator, the arranger and the investors.¹²⁸

Whilst it is probably fair to say that the majority of Real Estate-Backed Securitisations are supported by mortgages loans, the market in Europe is seeing more and more transactions, which are based on real estate cash flows.

125 Cf. Pickersgill (2001), p. 125.

126 Real Estate Securitisation and Property Securitisation are exchangeable terms. In order to avoid confusion in this thesis only Real Estate Securitisation will be used.

127 Cf. Rügemer and Siemes (2002), p. 771.

128 Cf. Schulte, et al. (2002), p. 780.

Hence, the cash flows from the actual real estate are being securitised and not the cash flows from the real estate loans.¹²⁹

There were already several Real Estate Securitisations in Europe during the past 7 years, some in Italy and France, but most of them in the United Kingdom.

The assets included:

• Student Accommodation (Unite Finance One, Owengate Keele – UK).

• Shopping Centres (Trafford Centre - UK)

• Supermarket Chains (Sainsbury’s, Marks & Spencer’s - UK)

• Government and Corporate Apartments (Annington - UK, Powerhouse Finance – France, SCIP I &II - Italy)