How a securitisation works
The lender sells a pool of loans to a special purpose vehicle (SPV). The SPV issues notes (bonds) in several classes, from senior to junior, and uses the money raised to pay the lender for the loans. As borrowers repay, the cash goes through a set order of payments, the waterfall: senior notes first, then the classes below. The lender usually keeps servicing the loans.
This is the same layered idea as in a warehouse facility, but on a larger scale and, for public deals, with many investors and published documents.
Public securitisation
A public securitisation is marketed to many institutional investors, usually with a prospectus, a credit rating for each note class and, often, a listing on a stock exchange. Deals are typically named after a programme and a year, such as "Funding 2026-1". Public deals can be cheaper for large pools, but they cost more to set up and need detailed loan-level reporting.
Private securitisation
A private securitisation is placed with one or a few investors, often banks or funds, and the terms are not published. Many warehouse facilities are structured as private securitisations, and bank-sponsored conduits that fund themselves by issuing short-term asset-backed commercial paper also buy into private deals. Private deals are more flexible and can revolve, adding new loans over time.
From warehouse to term ABS
A common path for a growing lender, though not the only one, looks like this:
- Equity and early lines. The first loans are funded with equity and small credit lines.
- Warehouse facility. A bank or fund provides a revolving line secured on the loans.
- Track record. The lender builds months or years of loan performance data that investors can analyse.
- First term deal. Part of the warehouse pool is refinanced through a private or public securitisation, freeing the warehouse for new loans.
- Programme. Repeat issuers come back under the same deal name, sometimes several times a year.
Some lenders use forward flow sales instead of, or next to, securitisation. In the UK, credit card lenders often use a master trust, which issues several series of notes from one revolving pool.
Rules that apply
In the EU, securitisations fall under the Securitisation Regulation (EU) 2017/2402; in the UK under the Securitisation Regulations 2024 and the FCA and PRA rules made under them. Both set disclosure and due-diligence duties and require the originator, sponsor or original lender to keep part of the risk: the EU regulation says a "material net economic interest in the securitisation of not less than 5%", and the UK rules set the same 5% minimum. Deals that meet extra criteria can carry the STS label.