Securitization has been a game-changer in the financial world since it was first introduced in the 1970s. It has revolutionised the way companies and institutions raise capital, manage risks and liquidity, and has had a significant impact on the global economy.
The Securitization process involves pooling or merging assets, such as mortgages or loans, into a group that is then repackaged and sold to investors as marketable financial instruments. The new group of securitized portfolios is divided into different tranches, each with different degrees of risk and offering different yields.
The Credit Rating Agencies play a crucial role in determining the creditworthiness of these backed Securities. They use a variety of factors, including the creditworthiness of individual borrowers, the value of the underlying assets, and the structure of the securitization itself, to assess the risk of the associated securities.
The credit ratings assigned by rating agencies are a vital component of the securitization process and can significantly impact the price of securities. Higher-rated securities are considered less risky and, as a result, command higher prices in the market, while lower-rated securities are seen as riskier and command lower prices. The credit rating assigned can also influence the cost of borrowing for the issuer of the securities.
However, investors are advised not to rely solely on credit ratings and to carry out their own due diligence before investing. While Rating Agencies play an essential role in providing independent assessments of the creditworthiness of securities, it is crucial that all stakeholders, including regulators and investors, work together to ensure the benefits of securitization are realised, and associated risks are minimised.
Despite the significant benefits of securitization, it is important to acknowledge that it has also been associated with some risks, as evidenced by the 2008 financial crisis. To prevent similar crises in the future, it is necessary to ensure that Rating Agencies, Regulators, and Investors are proactive in identifying and managing associated risks.