Professional Documents
Culture Documents
Securitization
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Agenda
Concept of Securitization
ABS / MBS
CMO
Indian Experience
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What is Securitization
Process of pooling / repackaging non-marketable,
illiquid assets into tradable securities
Involves true sale of the underlying assets
Additional support provided by the originator/ issuer
to enhance rating of the securitized paper
Investors’ recourse restricted to proceeds from the
underlying assets and the credit enhancement
Securitization transforms the risk-return characteristics of an
asset to meet demands of the transaction participants
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Classes of securitised paper
Asset backed securitisation (ABS)
Auto pool securitisation
Mortgage backed securitisation
CDO/CLO : Collateralized debt/loan obligations
Lease rentals securitisation
Future flow securitisation (FFS)
Securitisation of receivables to be generated in future
Road toll securitisation
Telecom receivables securitisation
Credit card receivables securitisation
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Typical transaction structure
Originator Credit Enhancement Liquidity Facility
Providers Providers
Sale of
Purchase
Loans Issue of securities (PTCs)
consideration
Original
Servicing
Loan SPV Investors
Obligors of securities
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Parties to a securitisation
Initial owner of the assets
Originator Sells its asset to the SPV
Subscribe to securities
Investors issued by SPV
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Parties to a securitisation (contd.)
Collects monies from Obligors,
Servicer
monitors and maintains assets
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Parties to a securitisation (contd.)
Provides a rating for the deal
Credit Rating
based on structure, rating of
Agency parties, legal and tax opinion etc
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Conventional business model
Traditional bank / FI
Origination Servicing
Funding
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Classical Financial Model
Bank's ability to lend restricted by:
⚫ The capital it could raise through traditional
borrowing (deposits)
⚫ Geographical concentrations
⚫ Nature (tenure) of liabilities raised
Posed a systemic challenge of failure to the banking model
Investors’ appetite restricted by:
⚫ Low availability of highest credit paper
⚫ Assets to match the liabilities raised
⚫ Lack of dissemination channels available to Mutual
Funds, Insurance Companies etc.
Need an evolution of markets to address these issues
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Changing business model
Securitization leads to..
Origination Servicing
Origination Servicing
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…unbundling of roles
Institutions with good distribution arms can concentrate
on origination without holding to maturity
Can expand lending as constraint on capital removed
Servicing expertise improves operational efficiency of the
sector
Disaggregate, repackage and distribute assets to different
parties - able and willing to accept them
Realize benefits from specialization and economies of scale
Enabling banks to achieve higher RoA and RoCE
Investors get customised investment solutions from the
originators
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Securitization – Transcending the
barriers
Loans, origination and HTM, static book
Credit • PTCs
• STRIPS
• Trading
Credit market • Credit views
• Dynamic
portfolio
management
Markets
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Essential for capital market evolution
Helps banks access funds for onward lending in infrastructure,
retail sector
Diversifies risk in the economy by reducing concentrations
Gives transparency to the way lending is priced by marrying
demand with supply
Improves internal monitoring of asset portfolio to take stock of
actual risk levels on the balance sheet
Brings out operational efficiency and robust risk management
through the involvement of external rating agencies on
internal portfolio
With increasing development, leads to standardization of
lending and borrowing operations and servicing capabilities
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Benefits of Securitization …
⚫ Managing portfolio concentrations through
Portfolio
investment in diverse pools of assets and
management
reducing heavy exposures
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Benefits of Securitization …
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Securitisation – Evaluation
Parameters
Ability to borrow
High leverage restricts on-balance sheet funding
Securitisation reduces leverage
Rating of originator
Poor rating inhibits borrowing
Securitisation ensures higher rating through
cherry-picking
credit-enhancements
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Securitisation – Evaluation
Parameters (contd.)
Cost of borrowing
Securitisation allows lower cost borrowing
Rating of borrower does not impact transaction
rating
Reduction in leverage
Tenure of borrowing
Long-term funds available
Matching of borrowing with assets
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Illustration #1 – Medium-sized
NBFC
Background
Player in auto-loan segment
Small capital base/high leverage leading to:
Low rating/ high cost of borrowing
Capital is a constraint for business expansion
Solution – Securitize auto-loans
Lower cost of funding
Ability to raise fresh assets
Improved return on capital
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Illustration #2 – Large-sized Bank
Background
Large bank – present in all asset classes
Aggressive size and profit targets need:
Constant funding for asset creation
Increased margins without affecting volumes
20
International Experience
Global structured finance issuance in 2021 was $1.53
trillion that is expected to grow to $3.14 by 2027.
Mortgage related issuances outstanding UPB, Unpaid
Principal Balance) in the US markets alone is at $ 7.7
trillion from around 1 million issues
This market represents maximum depth and width
where the entire range of credits (from AAA to BB) is
traded
Investors in sub-investment grade credits include
hedge funds and private equity funds
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