Asset Securitization

Securitization
Securitization is the issuance of marketable securities backed by the expected cash flows from specific assets (receivables)

Parties to an issue
Originator SPV Special purpose Vehicle Obligors
The initial owner of the loans. Sells them to the SPV Set up specifically for transaction. Purchases assets from Originator. Company/Trust/ Mutual Fund The loan customers. Pay cashflows that are securitised

Investors

Subscribe to securities issued by SPV

Parties to an issue (contd.)

Collection Agent Credit Rating Agency Credit Enhancement Provider Merchant Banker
Collects money from Obligors, monitors and maintains assets. Usually the originator Provides a rating for the deal based on structure, rating of parties & portfolio, legal and tax opinion etc Provides credit enhancement by way of swaps, hedges, guarantees, insurance etc. As structurer for designing & executing the transaction and as arranger for the securities

Generic deal diagram

Obligors
2 Collections 1 Original Loan Cash flows 10

Credit Enhancement Providers

3 Credit enhancement 9 Issue of securities 11 Servicing of securities

Collection Agent Originator

SPV
Sale of asset 6 7 Purchase consideration 4 Rating

Investors

8 Subscription to securities

Rating Agency
5

Arranger
Contracts Ongoing cash flows Initial cash flows

Structurer

Why securitize assets?

More efficient financing Improved balance sheet structure Better risk management

What type of assets can be securitized?

Any type of asset with a reasonably predictable stream of future cash flows can be securitized. Assets that are easiest to securitize are those: that occur in large pools; for which past experience can be used to predict default rates; for which documentation is standardized; and for which ownership is transferable.

Types of Securitization
MBS (Mortgage based securitization ) ABS (Asset based securitization)

Benefits to Originator
Off balance sheet financing Regulatory capital relief Improvement of RoCE Multiple alternative sources of funding Conversion of illiquid assets into liquid securities Systemically solves ALM problems in the sector - mismatch due to difference in tenor and characteristics of assets (mostly fixed rate and up to 30 years) and liabilities

Benefits to Investor
Enjoys low cost operations and servicing due to economies of scale of the originator Credit risk is minimized
Exposure on rated, low-risk housing loans Expertise of originators helps maintain quality of underlying assets Credit enhancement possible

Benefits to Financial System

Cleaner books due to expertise of originators Systemically solves the ALM problems in the sector Encourages an efficient market Results in substantial benefits to the end customer of home loans

What is required for a successful asset securitization?

Robust financial infrastructure
The Legal Environment The Accounting Environment The Regulatory Environment The Taxation Environment Back-office Systems

Drivers of Strong Investor Demand

 Receivables are sufficient to meet the payments promised by the SPV  Safeguards exist to provide for shortfalls in cash from receivables  Investors have clear legal claims on the income from receivables and have adequate protection in the case of delinquency.

Strong Investor Demand contd Credit Enhancement

Third Party Guarantees Subordinated debt Over-Collateralization Cash Collateral Accounts

SECURITISATION -INDIAN CONTEXT

First deal in India between Citibank and GIC Mutual Fund, in 1990 for Rs. 160 million. Securitisation of cash flow of high value customers of Rajasthan State Industrial and Development Corporation in 1994-95, structured by SBI cap. Securitisation of overdue payments of UP government to HUDCO by issue of tax-free bonds worth Rs. 500 million Securitisation of Sales Tax deferrals by Government Of Maharashtra in August 2001 for Rs. 1500 million with a green shoe option of Rs. 75 million. First deal in power sector by Karnataka Electricity Board for receivables worth Rs. 1940 million and placed them with HUDCO. Mega securitisation deal of Jet Airways for Rs. 16000 million through offshore SPVs. Data indicate that ICICI had securitised assets to the tune of Rs. 27500 million in its books at end March 1999.

Some of the companies that have been Involved in this are Ashok Leyland finance Cholamandalam investment & finance Esanda finance Sakthi finance Tata finance SRF finance

MBS - A Win-Win for All

Originators Churn higher returns on lower capital base Investors Can invest in low-risk rated home loans paper without hassles of origination/ servicing Financial system as a whole Expertise of Specialists helps maintain quality of underlying assets and reduces ALM mismatches Home Loan Customers Access to cheaper funds

Committee involved in Securitization

Narasimham committee I & II Andhyarujina committee
Recommendations made by them
Empower banks & FIs to take the possession of the assets & to sell them wihout the intervention of the court, was enacted.

When the bill was passed?

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002. on 21.06.2002. It received the assent of the President on 17.12.2002 and has now become an Act.

Thank you