By means of asset-backed securities, uncertificated assets are converted into capital market viable interest bearing securities. By contrast, credit derivatives are capital market based financing instruments which serve to transfer credit risks associated with risk assets to another party, whereby the original basic relationship is neither novated nor changed.
These two instruments in addition to credit syndication serve risk management in general and credit portfolio control in particular.
The generation of capital market viability for a structured real estate loan gives rise to high initial costs as well as consultancy and control expenditure.
As of today we cannot predict whether and to what extent default or a fall in the value of the derivatives in the capital market system may have an effect on the principal debtor or investors. With regard to the “sale” of nonperforming loans, so-called NLP’s8, to hedge funds and the like, the first reports from the field in part comment on execution proceedings for the sole purpose of foreshortening realisation and increasing rates of return.
8 Non performing loans