Asset-Backed Securities (ABS)

ABS transactions provide exposure to the income generated by large, diversified pools of high-quality assets such as mortgages, car finance agreements, and corporate loans. Investors can gain exposure to these regular cashflows via bonds that are backed by the asset pool.

ABS remains poorly understood in parts of the investment community, but we believe the attractive income and flexibility it offers could benefit a much broader audience. ABS has historically shown low or negative correlations to traditional asset classes, making it a valuable tool for diversifying a portfolio away from more mainstream fixed income markets such as corporate and government bonds.

TwentyFour’s ABS funds cover the whole risk spectrum available, from enhanced cash to direct asset-backed lending. The breadth and size of what we manage enables us to leverage our relationship with both issuers and banks, which can offer potentially material benefits in yield and structuring for the investors in our strategies.

What are Asset-Backed Securities?

Asset-Backed Securities (ABS) are a type of bond, typically issued by banks or other lenders.

What makes ABS different to other parts of fixed income, such as government or corporate bonds, is that they are ‘secured’ against a specially designed pool of loans with similar characteristics.

This collateral pool will typically contain thousands of high-quality loans such as mortgages, and the repayments on those assets are directed straight to investors in the bonds.

This is where the phrase ‘securitisation’ comes from – investors’ coupons are secured by the cash flowing from the regular interest and principal paid on the assets included in the pool.

• Asset : Thousands of assets with regular repayments and similar characteristics, such as mortgages or car loans, are pooled together.
• Backed : The company issuing the ABS sets up a legally separated Special Purpose Vehicle (SPV), which purchases the asset pool. The bonds investors buy are backed by the interest and principal proceeds from the asset pool. This means bondholders’ exposure is to the assets themselves rather than the seller of those assets; in an RMBS, for example, investors have exposure to the mortgages but not the bank that made those loans to customers.
• Securities : The company sells bonds – or securities – via the SPV to investors, who are paid directly from the repayments on the assets in the pool.

At first glance, the ABS market can look like a confusing mix of acronyms (RMBS, CLOs, Auto ABS) but they simply identify the assets backing the bonds – residential mortgages, senior secured corporate loans, auto loans.

ABS at a glance

Why invest?