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The process of pooling a group of financial assets together to create a new security, which is then marketed and sold to investors. The value and cash flows of the new security is based off of the underlying value and cash flows of the assets used in the securitization process. Companies will securitize illiquid assets into liquid assets in order to increase their overall liquidity and generate immediate proceeds from their assets.
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A company (the originator) begins the securitization process by gathering a series of financial assets, such as accounts receivables. These assets are then sold or transferred to an issuer, or special purpose vehicle (SPV), which is used to manage the assets and legally protect the company from the assets' obligations. The SPV will then sell the securities, which are backed by the assets held in the SPV, to investors. The cash flows generated by the underlying assets are then transferred to the investors who purchased the asset-backed securities (ABS).
The originator will have received some proceeds from the securitization, which can be used for its ongoing operations or other business uses. During the securitization process, the SPV will often get a rating agency to assign the assets a rating based on the ability of the assets to meet the principal and interest payments on the new securities being sold by the SPV. The SPV may also use credit enhancements to lower the risks of the securities being sold off to make them more attractive to investors.
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