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DEBT SECURITISATION

What is Securitisation

Parties to Securitisation Borrower Lender Trustee Investor .

all these loans are “RECEIVABLES” for Sunil as he has to receive or recover those loans back!  All these receivables are ASSETS for Sunil as per accounting norms  All these pool of assets is transferred in favour of Special Purpose Vehicle (SPV) or a trustee .Let us take an example  Ravi takes a loan from Sunil  Loan is granted as per the terms and conditions of the loan  Sunil provides loans to various other people on similar terms and conditions  In other words or say in Accounting/Finance language.

Further down….  Now the trustee issues these securities to an Investor  The Lender’s income is usually the difference between interest on loan receivable from the borrower and interest paid to investor .

00.000.000.000.000.00.00 5.00 15.00 5.PRACTICE AND UNDERSTAND  DELIGHT FINANCIAL SERVICES HAS ISSUED FOLLOWING LOANS Name of Loan Taker Type of Loan Loan Amount Rate of Interest Prachi Vamsi Rakesh Yamuna Housing Loan Car Loan Car Loan Housing Loan 10.00.00 10% 12% 12% 10% What are the receivables for Delight Financial Services or say “POOL OF ASSETS” .00.

PRACTICE AND UNDERSTAND  Now Delight wishes to securitise this and step in the process of taking it down to the investor  Can you tell the steps in this process? .

A convenient mechanism to suit changing needs of borrowers and lenders Matches supply of funds with demand demands for funds through floating negotiable securities Shifts the source of repayment from earning to a pool of assets .SECURITISATION OF FINANCIAL ASSETS Why Securitisation: 1. 3. 2.

SECURITISATION OF FINANCIAL ASSETS Elements of Securitisation: 1. Conversion of existing illiquid assets like loans. 2. advances and receivables into tradable security Reconverting them into fresh assets through capital market operations .

2. Separates the credit risk of the assets from the credit risk of the Originator Lower the cost of borrowing for Originator as the security is independent of the rating of the corporate securitising these assets Illiquid assets converted into marketable securities and thus provide alternate funding source 3. .SECURITISATION OF FINANCIAL ASSETS Benefits of Securitisation: 1.

Remove assets from balance sheet and thus improve capital adequacy 5.SECURITISATION OF FINANCIAL ASSETS Benefits of Securitisation : (contd) 4. Operations in a particular portfolio of assets can be increased without increasing total exposure .

Credit Enhancer: To reduce the overall credit risk of a security issue by providing senior subordinate structure. 2. over-collateralization or a cash collateral . Bankruptcy remote Separates the risk of assets from the credit risk of the seller 3.SECURITISATION OF FINANCIAL ASSETS The Players and their Role: 1. 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 a. b.

Insurance Company / Underwriters: To provide cover against redemption risk to investor and / or undersubscription 6. Investor: The party to whom securities are sold .SECURITISATION OF FINANCIAL ASSETS The Players and their Role: (contd) 4. Credit Rating Agency: To provide value addition to security 5.

SECURITISATION OF FINANCIAL ASSETS Requirements for Eligible Collaterals: 1. Cash flow profile . Maturity period 4. Underlying assets 3. Assets to be securitised to be homogeneous in terms of: 2.

Housing finance Term loan finance Car loan Credit card receivables Export credit Etc. .SECURITISATION OF FINANCIAL ASSETS Eligible Collaterals: 1. 6. 3. 4. 2. 5.

6. 4. 3. Housing finance Term loan finance Car loan Credit card receivables Export credit Etc. 5. .SECURITISATION OF FINANCIAL ASSETS Eligible Collaterals: 1. 2.

a bond or debenture. a promissory note. Promissory note / bonds / debentures make available different tenor maturities and yield to different investors . The PTC passes the cash flows from borrowers in the same form to investors. However.SECURITISATION OF FINANCIAL ASSETS Instruments: Depending on the structure of securitisation. the instrument would be pass-through certificate (PTC). 1. negotiability is restricted as the investor has to return the PTC to SPV 2.

3. 5. 2.SECURITISATION OF FINANCIAL ASSETS Securitisation Process: 1. Selection of assets by the Originator Packaging of designated pool of loans and advances (assets) Underwriting by underwriters 4. Assigning or selling to of assets to SPV in return for cash Conversion of the assets into divisible securities .

9. 8. 7.SECURITISATION OF FINANCIAL ASSETS 6. SPV sells them to investors through private placement or 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 collateralisied by assets The difference between the rate of the borrowers and the return promised to investors is the servicing fee for originator and SPV .

SECURITISATION OF FINANCIAL ASSETS Legislations / Enactments and their impact on securitisation transactions: The Companies Act 1956 affect the SPV in the following manner: 1. Framing of Memorandum and Article of Association of the SPV and formation of SPV as a Limited Company 2. Issuance of Bonds / Debentures etc. Borrowing Powers / delegation of powers for recovery of receivables etc. Management of affairs viz. to investors (whether by public issue or private placement) and servicing the investors . 3. Board of Directors. Share Capital Structure 4.