Why Are Debts Securitized?

Securitizing debts occurs when companies and financial institutions are trying to increase their liquidity. Debt that is securitized is converted into tradable securities and sold to raise funds.

Purpose

• Debts are securitized so they can be sold. Securitized debts offer credit ratings to potential purchasers, and these debts are often considered illiquid. By securitizing these debts, companies are able to sell them to raise funds.

Details

• Securitized debt is normally illiquid. This occurs often with banks and mortgage loans. If there is no market for mortgage loans, banks cannot sell them. When this happens, banks repackage these mortgages into tranches of debt, or marketable securities. The banks securitize these debts and rate them by risk. Each securitized debt then contains a credit rating and is based on risk and amount of cash flows generated by the debt.

Features

• Any type of asset can be securitized. This includes auto loans, mortgages and credit card receivables. Securitized debts with high ratings are typically easy for financial institutions to sell.