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Loss Allocation in Securitization Transactions

Published online by Cambridge University Press:  07 June 2012

Günter Franke,
Markus Herrmann and
Thomas Weber
Günter Franke
Affiliation:
guenter.franke@uni-konstanz.de, University of Konstanz, Department of Economics, POB 147, D-78457 Konstanz, Germany
Markus Herrmann
Affiliation:
markus.herrmann@lbbw.de, Landesbank Baden-Württemberg, Am Hauptbahnhof 2, D-70173 Stuttgart, Germany
Thomas Weber
Affiliation:
thomas.weber@axpo.ch, Axpo Holding AG, Parkstrasse 23, 5401 Baden, Switzerland
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Abstract

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This paper analyzes the loss allocation to first, second, and third loss positions in European collateralized debt obligation transactions. The quality of the underlying asset pool plays a predominant role for the loss allocation. A lower asset pool quality induces the originator to take a higher first loss position, but, in a synthetic transaction, a smaller third loss position. The share of expected default losses, borne by the first loss position, is largely independent of asset pool quality but lower in securitizations of corporate loans than in those of corporate bonds. Originators with a good rating and low Tobin’s Q prefer synthetic transactions.

Information

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 47 , Issue 5 , October 2012, pp. 1125 - 1153
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2012

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