Hi. Could anyone help me with the difference between securitization and a contingent loan. The both rely on the emergence of future profits.
Securitisation can involve other types of risk transfer, ie repayment may be contingent on other events, not just making future profits. With Securitisation: An investor purchases a bond from the insurance company (ie a loan is provided) with repayment contingent on a specified event (this could be making future profits or could be on a catastrophe not happening). Also with Securitisation, there is often a SPV (Special Purpose Vehicle) which breaks the link between investor and insurance company and this can help with structuring cashflows and risk transfer. So in summary, whereas Securitisation can involve different forms of risk transfer between different investors, a contingent loan is often between issuer and bank with loan contingent on making future profits. Hope this helps.
