The Sponsor of a securitization (let's call them "ABC") is looking to fund its holding of the most senior tranche (which is rated Aaa) of a deal they securitized.
According to article 405 of the European Banking Authority (https://www.eba.europa.eu/regulation-and-policy/s…), they must retain 5% vertical ownership to satisfy requirements. In this example, they are financing the Aaa tranche and junior and equity tranches are financed separately from another provider.
ABC is taking the senior-most tranche and pledging it (let's say, $100mm) to a Guarantor. A bank (let's call them "DEF") will issue ABC a loan of $100mm and the loan is backed by the $100 million pledged from ABC to the Guarantor. It is a pass-through (the P&I that Bank DEF receives is whatever accrues to the $100mm that was pledged from ABC to the Guarantor; there is no rate arbitrage taking place).
Borrower ABC is still on the hook for the shortfalls on the $100mm loan to DEF if the pass-through funds are insufficient.
They are doing this to "fund" their retention of the 5% amount they are legally required to hold.
Here are my questions:
I'm not sure I fully understand how or why banks "finance things" as a broad concept. I apologize if this is very obvious but how does it help the bank to "disown" a good Aaa asset by doing a transaction such as this? My guess is that it reduces assets and thus, the need to put up more to equity to stay within the leverage ratios. Is that right, or is there a more important reason for doing something like this?
My other question is if they own a piece of this deal, they are holding onto a Aaa rated asset which is cash-flowing why would they want to get off their balance sheet? Hasn't it already been "financed"? The underlying collateral has already been underwritten and securitized. Is it not already paid for/financed?
It looks like they are trading an Asset (the Aaa note) for a liability (what they are borrowing). Is this correct?
The junior and equity trenches of this deal are being "financed" elsewhere. Would short-term financing be materially different from this long-term financing?
Bit of a legal questions so feel free to pass or hypothesize: if ABC is stock lending a position and that debt is being pledged elsewhere, does ABC still retain ownership? Are they still satisfying the 5% requirement?
