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)

Provides
loan

Bank/Financial
Institution
(Originator)

Loan sold

Arranger/
Issuer

Loans pooled
and sold to Trust

Makes loan

payments

Provides customer service

to borrower

SPV
(Trust)

Servicer
(is employed by Trust to
collect loan payments etc.)

Remits loan payments to Trust and

advances unpaid interest payments.

issues
securities

Investors

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