December 22, 2011

[A Brief Detail About Securitisation]

SECURITISATION
Submitted by Avishek Kumar Roll No- P61026 CONCEPT
SECURITISATION INVOLVES  Selling ‘existing receivables’ or ‘future inflows’  To an intermediary ( or SPV ) for PRICE.  SPV pays the price by Selling them to investors in smaller quantities  In form of financial claims ( called ‘securities’)  Through capital market . FEATURES  Sec’n coverts illiquid assets into liquid ones.  Securities : financial claims which can be traded in market

SEBI: PUBLIC OFFER AND LISTING OF SECURITISED DEBT INSTRUMENTS REGULATIONS, 2008
     “Securitisation” means acquisition of debt or receivables by any special purpose distinct entity from any Originator / s for purpose of issuance of Securitised debt instruments to investors based on such debt or receivables and such issuance

APPLICATION OF SECURITISATION
1). EXISTING RECEIVABLES
     Mortgage Loans Equipment Lease / HP receivables Housing loan receivables Auto loans etc. Real estate Lease receivables

2).FUTURE RECEIVABLES
 Generating Out of Contract  Oil , Electricity , Gas revenues  Not generating out of contract ( future projected flows)  Future billings of Airlines  Toll Receivables ,Ports, Airport operators  Urban Infra: Water, sewerage charges etc.

NICMAR, PGPPEM 6TH BATCH

Page 1

SEBI requirements : a) Merchant Bankers to manage issue. MFs. Pension Funds etc. L/C from banks or Fin. Commercial Paper. Bonds etc. PGPPEM 6TH BATCH Page 2 . additional security. extent of security. maturity pattern – (to make pooling convenient) 3. b) Collection of receivables: Originator continues to collect receivables against small fees & pass on SPV. cash deposit. 2011 [A Brief Detail About Securitisation] PROCESS 1. 6. f) Liquidity support : by SPV (if required)  To make good shortfall (if any) in recoveries from originator. c) Trustee: To oversee process of sec’n and ensure compliance by originator & SPV. Investors: Banks. Securities: ‘Pass through’ or ‘Pay through’ 5. Govt. Institutes. underwriting if necessary.December 22. over-collateralization..  BENEFITS To Originator • Raise funds immediately (say in one or two years) after start of operation. FIs. Bills. National Mortgage Association (GNMA). 7. Form of Securities: promissory notes. Assets: should be homogeneous in nature. Other requisites: a) Documented history of delinquency b) Standardized contracts c) Diversified Portfolio d) Low Losses 4. SPV: Entity (trust) specially created for this purpose [US: specially created agencies Govt. • Faster rotation / multiple asset creation >> higher profits • Cheaper source • May beat the rating of company ( b’coz rating checks reliability of flows of only the particular project and not credibility of company in general ) To Investors • Good Quality Debt • Process supervised by trustee • No administration of receivables required • Better returns To SPV – Management fees NICMAR. obtain credit rating (minimum ‘investment grade’). d) Escrow A/C : to be operated by trustee e) Credit enhancement : by originator (if required) Financial guarantees. Federal Mortgage Association (FNMA)] India: IDFC. ILF&S 2.

5. Only highly rated papers are in demand but no market for modest rated papers Legal / tax regulations unclear. SECURITIZATION STORIES (JULY 09 BUSINESS LINE)  Vishnu Prayag 400 Hydro power project  JP Power Ventures securitized future receivables amounting to Rs 1.750 cr. and paid off Rs 900 cr. in outstanding debt to banks. 2. 3. Interest paid to all trenches regularly.December 22. 4.  Time over which receivables have been securitized exceed maturity of the existing debt. 10 yrs & 15 yrs.PAY THROUGH SECURITIES ALSO KNOWN AS [COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) ] 1. principle paid first to fastest trench & then to another trench. Rated high quality ( b’coz of SPV assurance) > Lower returns to investor SECURITIZATION IN INDIA • • • • Costlier than other cheaper sources available. Originator mostly does not take risk of defaults by obligators. SPVs can make temporary investments of excess cash 7. No prepayment risk / default risk for investor b’coz SPV commits regular payouts Securities trenches: 7 yrs. 2011 [A Brief Detail About Securitisation] TYPES 1).  JP mainly supplies electricity to UP Power Corporation. Secondary market is not so deep for debt instruments. 6. PGPPEM 6TH BATCH Page 3 .  Securitized paper was placed with few banks at competitive coupon rate. Investors are DEBT Investors Receivables not sold. Security Holder (Investor) entitled to proportionate share of periodic cash flow (Usually known as cash flow investor) 2.PASS THROUGH SECURITIES 1. Disadvantage: Default risk for Security holders (Investors) 2). NICMAR. but only charged in favor of Trustee (on behalf of SPV). 3.

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