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Securitization: Presented by Saket Kumar

Securitization involves pooling various types of assets like loans, mortgages, and receivables, and issuing marketable securities backed by those assets. An originator like a bank sells the assets to a special purpose vehicle that converts them into securities, which are then sold to investors through underwriters. The process aims to transfer risk from originators to investors while allowing originators to raise funds and improve their balance sheets.

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Jayati Bhasin
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49 views

Securitization: Presented by Saket Kumar

Securitization involves pooling various types of assets like loans, mortgages, and receivables, and issuing marketable securities backed by those assets. An originator like a bank sells the assets to a special purpose vehicle that converts them into securities, which are then sold to investors through underwriters. The process aims to transfer risk from originators to investors while allowing originators to raise funds and improve their balance sheets.

Uploaded by

Jayati Bhasin
Copyright
© Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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22/09/2010

SECURITIZATION

PRESENTED BY Saket kumar

SECURITIZATION
It stands for conversion of loans or loan recoveries into marketable paper or securities by SPV. By pooling assets, it diversifies and reduces risks of the portfolio and, with additional credit enhancement arrangement, can produce highly creditworthy instruments to market. Isolating and efficiently allocating the risk. It is selling the rights to cash flow from loans etc .

SECURITIZATION PROCESS
Selection of assets by the Originator Packaging of pool of loans and advances (assets) Underwriting by underwriters. Assigning or selling to of assets to SPV in return for cash Conversion of the assets into divisible securities SPV sells them to investors through private stock market in return for cash Investors receive income and return of capital from the assets over the life time of the securities The risk on the securities owned by investors is minimized as the securities are collateralized by assets The difference between the rate of the borrowers and the return promised to investors is the servicing fee for originator and the SPV . Assets to be securitized to be homogeneous in terms of underlying assets ,maturity period ,cash flow profile

STRUCTURE OF SECURITIZATION

PLAYERS INVOLVED IN SECURITIZATION


1.

2. 3. 4. 5. 6. 7.

Originator: An entity making loans to borrowers or having receivables from customers Special Purpose Vehicle: The entity which buys assets from Originator and packages them into security for further sale Investment Bank : A body that is responsible for conducting the documentation work. Credit Rating Agency: To provide value addition to security Insurance Company / Underwriters: To provide cover against redemption risk to investor and / or undersubscription Obligors: Company that gives debt to other company as a result of borrowing.( debtor) Investor: The party to whom securities are sold .

SPV AND ITS ROLE


It is a legal entity created to fulfill the narrow, specific or temporary objectives. ie funding the assets. SPV are typically used by companies to isolate the firm from financial risk and allow other investors to share the risk. Intermediary Helps in the pooling process Holding of pooled securities as a repository Bankruptcy remote transfer

WHY ORIGINATOR SECURITIZE


Off-balance sheet financing remove illiquid assets. Improves capital structure Extends credit pool Reduces credit concentration Risk management by risk transfers Avoids interest rate risk Improves accounting profits

INVESTOR VIEW POINT


ADVANTAGE Opportunity to potentially earn a higher rate of return . Opportunity to invest in a specific pool of high quality credit-enhanced assets . Portfolio diversification . DISADVANTAGE Prepayment by borrowers can lessen the earning through interest. Currency interest rate fluctuations which affect the floating rates on ABS. Maintenance obligations of the collateral are not met as given in the prospectus.

CATEGORY OF SECURITIZATION
Assets backed securities :Those securities whose income is derived from pool of underlying assets. Example: payments from car loan, credit card. Mortgage backed securities: Mortgage loans are purchased from banks and assembled into pools which become securities. Credit debt obligation: CBO: Those backed b corporate bonds. CLO: Those backed by leveraged home loans.

EXAMPLE OF SECURITIZATION IN INDIA


First securitization deal in India between Citibank and GIC Mutual Fund in 1991 for Rs 160 million. L&T raised Rs 4,090 mln through the securitization of future lease rentals to raise capital for its power plant in 1999. Securitization of aircraft receivables by Jet Airways for Rs 16,000 mn in 2001 through offshore SPV. Indias largest securitization deal by ICICI bank of Rs 19,299 mn in 2007. The underlying asset pool was auto loan receivables

WHAT CAN BE SECURITIZED


All sorts of assets are securitized: Auto loans Student loans Mortgages Credit card receivables Lease payments Accounts receivable.

BENEFITS TO FINANCIAL ENVIRONMENT


This bring the financial market and capital market together and hence increase the power of capital market. The securitization reduces the risk for the creditor so it will lead the lower cost of funding. Agency and intermediation cost is reduced. The rate of assets turnover in market increases. HFCs do securitize due to this the volume of the resources increases. Component risk (credit ,liquidity, catastrophe) are segregated and distributed to the market intermediaries which absorb them and make market stable.

The Subprime Mortgage Securitization Process


Warehouse Lender
(makes short term loans to Issuer for purchase of mortgages)

Credit Rating Agency

Requests loan

Mortgagor (Borrower)
Makes loan

Provides loan

Bank/Financial Institution (Originator)

Loan sold

Arranger/ Issuer

Loans pooled and sold to Trust

payments

Provides customer service to borrower

Servicer (is employed by Trust to


collect loan payments etc.) Remits loan payments to Trust and advances unpaid interest payments.

SPV (Trust)
issues securities

Investors

Adapted from: Understanding the Securitization of Subprime Mortgage Credit Ashcraft and Schuermann, Federal Reserve Bank o f New York Staff Report 318, March 2008.

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