Table of Contents

Securitization ................................................................................................................................................ 2
Securitization Structure ............................................................................................................................ 2
Parties Involved......................................................................................................................................... 2
Obligor................................................................................................................................................... 2
Originator .............................................................................................................................................. 3
SPV ........................................................................................................................................................ 3
Investor ................................................................................................................................................. 3
Credit Rating Agency ............................................................................................................................. 3
Structurer .............................................................................................................................................. 3
Ancillary Service Provider ..................................................................................................................... 3
Administrator ........................................................................................................................................ 3
Various Stages involved in Securitization ................................................................................................. 3
Identification process............................................................................................................................ 3
Transfer process .................................................................................................................................... 3
Issue Process ......................................................................................................................................... 4
Payment Process ................................................................................................................................... 4
Types of Securities .................................................................................................................................... 4
How is Securitization different from Traditional debt instrument? ......................................................... 4
SPV ........................................................................................................................................................ 4
Source of payout ................................................................................................................................... 4
Credit Enhancement facility .................................................................................................................. 4
Advantages of Securitization .................................................................................................................... 4
To the originator ................................................................................................................................... 4
To the investor ...................................................................................................................................... 4

Securitization
Securitization is the process of pooling and repackaging of homogenous illiquid financial assets into
marketable securities that can be sold to investors. It is a systematic process whereby loans and other
receivables are pooled, packaged, rated and sold in the market in the form of asset-backed securities.
Please read the title The Concept and Parties involved from your core reading Chapter on
Securitization.

Securitization Structure

Parties Involved
Obligor
These are original borrowers. The payments made by the borrowers are the sources of cash flow used
for making investor payments.

Originator
Any financial institution, bank or any other entity, which has decided to adopt securitization of assets is
known as originator. He is the prime mover of the deal.
Originator sells the assets on its books and receives funds generated from sale. Example: NBFCs, ICICI
Bank, Citigroup
SPV
This is also called as issuer. This entity buys the loan from the originator and issues securities which
investors subscribe to.
Investor
They purchase securities from issuer. Banks, FIs, NBFC and Mutual funds are main investors.
Credit Rating Agency
Independent rating agencies like S&P, Moodys etc analyze the risks associated with securities and give
it a rating (AAA, BB etc)
Structurer
Mostly investment banks. They are responsible for structuring securities to be issued, getting in touch
with other parties such as investors, credit enhancers and rating agencies to successfully execute the
securitization transaction.
Ancillary Service Provider
These provider offer services like credit enhancement. Credit Enhancement refers to additional source
of funds that can be used if the collections on the assets are insufficient to pay investors their dues in
full.
Credit Enhancement thus supports the credit quality of the securitized instrument, enabling it to achieve
higher credit rating.
Administrator
He is just a collecting agent. He collects money from obligors and passes it to SPV.

Various Stages involved in Securitization

The following are the various stages involved in securitization.
Identification process
The leading financial institution, either a bank or any other institution (the originator) might have got
assets comprising of variety of receivables like mortgage, lease receivables, car loan etc. Originator has
to pick up a pool of assets considering maturities, interest rates, frequency of payments and
marketability. This process of selecting from these receivables for securitization is called identification
process.
Transfer process
In this process the SPV pays the originator and takes over the assets (loan).
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Issue Process
The SPV issues security instruments (means instruments backed by securities, like Mortgage backed
securities, MBS) to investors. The investors pay money and buy these instruments. For the investors, this
is another investment instrument.
Payment Process
In this the payment process takes place. The interest/principal paid by the obligor is passed through to
the SPV and then to the investor. The administrator acts as a collecting agent and does this job.

Types of Securities
Mainly two types of securities, which are:

MBS (Mortgage Backed Securities): Housing Loans which are backed by mortgage of the house
ABS (Asset Backed Securities): Loans like Car loan, Credit card etc.

How is Securitization different from Traditional debt instrument?

There are mainly three differences between securitization and traditional debt instrument.
They are:
SPV
The securitization process is conducted through an SPV, whereas in traditional debt instrument, there is
no such entity
Source of payout
In securitization, the investor payout is from the interest/principal provided by the obligor and not from
the operations of the SPV, who issues the instrument, whereas in case of traditional debt instrument,
the investor payout is from the company which issues the debt instrument.
Credit Enhancement facility
The credit enhancement facility (as explained above) is available in Securitization, which enhances the
credit rating of the security, whereas no such facility exists in traditional debt instrument. The debt
instrument is rated based on the creditworthiness of the company that issues it.

Advantages of Securitization
The following are the main advantages of securitization.
To the originator
Immediate payment
Wipes out the debts
To the investor
Investment opportunity
Higher yields than comparable debt instruments
Flexibility to tailor the instrument to meet the investors risk and tenor
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Please read Benefits of Securitization from your core readings for better understanding.