Asset Backed Securities (ABS)

A security backed by a collection of similar receivables (receivables portfolio), for instance loans, or accounts receivable originated by banks, credit card companies, or other providers of credit. The sale of ABS serves to create liquidity. Receivables with maturities of between 30-90 days are the rule. ABS is a modern form of corporate financing and can be viewed as a substitute for the traditional loan. This form of financing not only increases a company´s liquidity, generally at more favourable financing costs, its off-balance sheet status as well as the diversification of funds are also decisive aspects. To collateralize the securitized loans, financing instruments, which are described as securities backed by assets, are constructed.Mortgage-backed securities, collateralized by commercial or residential mortgages, are a specific type of ABS. It is common in securitisation markets to distinguish between ABS and mortgage-backed securities, viz., MBS. However, in markets outside the United States, the word ABS might cover all classes of securitised instruments, including those out of mortgages. Asset-backed securities are often issued by special-purpose entities. It includes (tranched) structured finance transactions as well as untranched securitisations.