Since the 2008 Global Financial Crisis (GFC), the asset-backed securities (ABS) market has undergone major reforms. These enhancements have significantly increased transparency, strengthened investor protections, and better aligned issuer incentives with investor interests. As a result, today’s ABS structures are more resilient and better regulated than those of the past, potentially offering attractive risk-adjusted returns.
ABS have historically weathered crises with lower default rates and shallower drawdowns than corporate bonds, making them a potentially attractive relative value play. Such resilience is not accidental; it stems from a disciplined framework that evaluates collateral quality and embeds multiple layers of credit enhancement, which can vary depending on the underlying collateral.
In an ABS transaction, sponsors transfer the underlying loans or receivables to a special purpose vehicle (SPV) that passes along the cash flows generated by the collateral to investors. The legal structure prioritizes ABS investor claims over other creditors and is bankruptcy-remote from the sponsor.
While credit enhancements may serve as safeguards against potential losses, it’s important to understand that issuers and rating agencies assess the credit risk of the underlying asset pool before an ABS transaction is even structured.
