Issuers of Asset-backed securities are allowed to raise cash that can be used further for lending or other investment purposes.
The ABS assets are often illiquid and can’t be sold on their own.
So, when assets are pooled together to create a financial instrument out of them, then that process is called securitization.
This securitization allows the issuer to make illiquid assets marketable to investors, and also allows them to get unstable assets off their books, thus reducing their credit risk.
The expected cash flows like home equity loans, automobile loans, credit card receivables, student loans, or others are the underlying assets of these pools.
The asset-backed securities have been built with cash flows from movie revenues, royalty payments, aircraft landing slots, toll roads, and solar photovoltaics so the issuers can be as creative as they want.
So any cash-producing vehicle or situation can be securitized into an ABS.
For investors, buying an ABS opens up the opportunity of a revenue stream.
The investors can participate in a wide variety of income-generating assets which is allowed to them by ABS, which is not available in any other investment.