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Passthrough Securities

See Also:
Collateralized Debt Obligations
Secured Claim
Subordinated Debt
Mezzanine Debt Financing (Mezzanine Loans)
Asset Based Financing

Passthrough Securities Definition

A passthrough security is a debt obligation that represents the cash flows towards a certain asset or liability. There is often an intermediary between the cash flows and the investor who provides a lump sum many times to receive several cash payments in the future.

Passthrough Securities Explained

Passthrough securities are similar to asset-based financing; however, asset based financing involves using an asset like land for a loan. Whereas a passthrough security simply passes future cash flows onto an investor. Some of the most well known pass through securities were involved in the recent financial crisis. These are regularly known as mortgage backed securities (MBS) and asset backed securities (ABS). Furthermore, these securities simply take the future mortgage or asset payments toward a certain asset and sell them in the market for a lump sum. As a result, a company can see more cash or liquidity up front. Notice that the passthrough occurs between the person making the payment to the bank or financial institution, and the financial institution then providing this cash to the investor. In most situations, a bank will assume the role as a passthrough entity.

Passthrough Securities Example

For example, Money Bank specializes in the real estate market and provides financing to individuals buying houses. In order to stay liquid and keep providing loans Money Bank groups the mortgages it has obtained every quarter and sells them in the marketplace at a discount. Bob is a wealthy investor and wishes to invest in something that will provide him a meaningful return. Bob comes across the passthrough securities provided by Money Bank and decides to purchase some of the pass through securities. Both parties have benefited because Bob is earning a meaningful return while the Bank has received liquidity and can now provide more real estate loans.

Passthrough Securities

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Asset Based Financing

See Also:
Mezzanine Debt Financing (Mezzanine Loans)
Subordinated Debt
Collateralized Debt Obligations
Passthrough Securities
Ledger Account
Negative Equity

Asset Based Financing Definition

Asset based financing is based upon collateralizing a loan with a certain asset or the cash flows from an asset like a receivable. Additionally, asset financing is used quite often to try and receive cash in the form of a loan. The investors in asset backed financing often have first claim over the assets.

Asset Based Financing Explained

Often times, companies have accounts receivable payments that they believe they will see in the future. If they believe that they will need financing soon they will use these future receivables and sell them off to investors. This allows the company to become more liquid by receiving a loan of cash up front rather than having to wait on the future receivables so that the company is able to meet its short term obligations. If the company were to default on this loan then the asset based lender could assume the future receivable payments to pay the loan. Another form of asset based lending is for a company to simply use an asset like equipment or land as collateral in order to obtain a loan. This occurs if a bank or other financial institution decides not to extend credit unless they have some sort of collateral.

Asset Based Financing Example

Tiny Tots Inc. specializes in the manufacture of toys. Currently, the company wants to obtain financing so that it can expand its operations into South America. After visiting with the bank, the bank decides that it will provide financing. But the company must use asset backed financing and put its current production facility up as collateral. Tiny Tots agrees with this proposition and a contract is signed. After 5 years of production Tiny Tots has become very successful in South America. Tiny Tots pays off the loan, thereby freeing the production facility from the asset backed security. It should be noted that if the company had failed to make the interest and principal payments that the bank has the ability to take possession of the production facility. Then the bank will sell it to pay off the loan.

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asset based financing
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asset based financing

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