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SECURITISATION

Vivek Joshi
Department of Business Management
MAHE MANIPAL Dubai Campus

WHAT IS SECURITISATION?
Securitisation is a financing technique that involves the
conversion of usually illiquid assets with predictable cash
flows into marketable securities. Essentially it is the process
of creating securities backed by pools of assets with the
securities then being sold to institutional investors

#Securitisation was first developed
in the U.S. in the early 1980's with
the technique brought to Australia a
few years later.

classification. markets alone. composition.06 trillion (as of the end of 2005. It has evolved from tentative beginnings in the late 1970s to a vital funding source with an estimated total aggregate outstanding of $8. by the Bond Market Association) and new issuance of $3. The technique comes under the umbrella of structured finance as it applies to assets that typically are illiquid contracts. collateralization.07 trillion in 2005 in the U.Securitization is a financing technique that allows the corporation to separate credit origination and funding activities. Acquisition. Securitization is the process of homogenizing and packaging financial instruments into a new fungible one.S. pooling and distribution are functions within this process .

. Investors buy the repackaged assets in the form of securities or loans which are collateralized (secured) on the underlying pool and its associated income stream. Securitization thereby converts illiquid assets into liquid assets.According to Mark Fisher & Zoe Shaw Securitization is the packaging of designated pools of loans or receivables with an appropriate level of credit enhancement and the redistribution of these packages to investors.

in order to fund the purchase. the assets are removed from the Seller's balance sheet. . would issue mortgage or asset-backed securities ("MBS/ABS") which are sold to institutional investors in the domestic or international capital markets.involve an entity (the "Seller") selling a pool of assets to a special purpose vehicle ("SPV".being a trust or a company). Securitisation separates the risks inherent in any corporate finance transaction and transfers these risks from the Seller to the purchaser of assets. The SPV. As the transaction is generally structured as an asset sale. Investors therefore rely on the cash flows from the pool of assets (and not the Seller) for repayment of their investment.

SECURITISATION PROCESS .

SPV Identification Process Issue of Security after Denomination Redemption/ Payment Transfer Process Credit Rating .

Types of Securitisation Securitization has two prototypical transaction types cash and synthetic .

 In synthetic securitization. a total return swap) on certain asset exposures as a kind of default insurance for credits that remain on balance sheet. . the corporation buys a credit default swap (or. purchase is effected by issuing multiple tranches of securities based on the cash flow generating capacity of the asset pool.Cash & Synthetic Securitisation  In cash securitization. the corporation pools assets together for purchase by a bankruptcy-remote special purpose vehicle (SPV) or special purpose entity (SPE). the swap can be an outright trade or it can be embedded in the balance sheet of an SPE against which liabilities are issued. less commonly.

using credit default swaps. such as insurance companies. Synthetic securitisation can replicate the economic risk transfer characteristics of securitisation without removing assets from the originating bank’s balance sheet or recorded banking book exposures. The transfer may be either funded. for example.Synthetic securitisation” refers to structured transactions in which banks use credit derivatives to transfer the credit risk of a specified pool of assets to third parties. for example. other banks. by issuing creditlinked securities in tranches with various seniorities (“collateralised loan obligations” or CLOs) or unfunded. . and unregulated entities.

It is a boon to financial institution.from the risk management point of view the lending institution have to absorb the entire credit risk by holding the credit outstanding in their own portfolio. .Securitisation and Impact on Balance Sheet Financial institutions and businesses of all kinds use cash securitization to immediately realize the cash value of their illiquid contracts or remove assets from the balance sheet. that is one asset (loan) is converted into cash. Securitisation provides an opportunity for diversification. balance sheet restructuring via securitization is much harder to effect under Some accounting practices prevailing in the world. However. It is worthwile to note that the entire transaction relating to securitisation is carried out on the assets side of Balance sheet. This helps balance sheet to stay healthy.

.Other Points are: Reinvestment opportunity Liquidity Higher returns Available margins Tax concessions continue {tax shield advantage} # All the above will result in capital adequacy for the bank and bank will not loose any opportunity of making a good investment & this adds to the performance.

00 Capital $ 2.33 Deposits $ 53.33 Balance sheet after securitisation Assets Amount Liabilities Amount Cash reserves $ 5.33 Total $ 55.33 Long-term Mortgages $ 50.00 Total $ 55.33 Deposits $ 53.Simplified Bank balance sheet before and after securitisation Balance sheet before securitisation Assets Amount Liabilities Amount Cash reserves $ 5.33 Total $ 55.00 Total $ 55.00 Capital $ 2.33 Cash proceeds from mortgage $ 50.33 .

which means that the risk of default is directly linked to the company's solvency. These are asset-backed securities. By pooling together a large portfolio of these illiquid assets they can be converted into instruments that may be offered and sold more freely in the capital markets. such as mortgage loans. plus repayment of the full face value of the bond (the principal) at the end of its life. So long as the issuing company is financially healthy it will continue to make these payments. When investors hold a conventional bond they get a regular interest payment during the life of the bond.Asset Backed Securities Asset-backed securities (ABS) are bonds backed by a pool of financial assets that cannot easily be traded in their existing form. . and then sells these assets to a specially created investment vehicle that issues bonds backed by those financial assets. the originator creates a pool of financial assets. In a basic securitization structure.

In a securitization. non-mortgage related securitizations have grown to include many other types of financial assets. . This protects ABS investors from losing their money if the company that originated the financial assets. auto loans and student loans. trade receivables. The royalty payments on David Bowie's back catalogue have even been used as securitizable assets. such as credit card payments. goes bankrupt. While residential mortgages were the first financial assets to be securitized. leases. these payments depend primarily on the cash flows generated by the assets in the underlying pool.

that has a reliable. The following is a list of the types of assets or cash flow streams that have been securitised: Aircraft Leases Auto Leases Auto Loans Business Loans Franchise Loans Home Loans Leases Operating Leases . or pool of assets. contractual or predictable cash flow to be repackaged purchased and then funded as debt securities and sold to institutional investors.    What   can be Securitised Securitisation is a financing technique that allows almost any asset.

Commercial Loans Pharmacy Loans Commercial Real Estate Loans Rental Streams Consumer Loans Royalty Streams Corporate Loans Take-or-Pay Contracts Credit Cards Trade Receivables Finance Loans .

source of funds. the Seller's asset base is reduced which may improve return on assets (ROA) and return on equity (ROE) without adversely impacting revenue streams. Diversification of funding sources A securitisation may provide the Seller with access to a new class of investors and therefore.. ..Benefits of Securitisation to the Seller. This would also result in an improved EVA position. Flexible finance The Seller can vary the level of funding required dependent on its financing needs and the volume of assets available for sale to the SPV. Improved financial ratios As the transaction is generally an asset sale.

Benefits of Securitisation Invisible to customers as the sale of assets is typically by way of equitable assignment. . there is no notification required to customers and the Seller maintains the direct relationship with those customers. Limitation of risk As the transaction is an asset sale. recourse is generally limited to the level of credit support provided by the Seller.

. A diversification of investment opportunities Asset securitisation allows investors to indirectly invest in a variety of asset classes.. The main benefits flowing to an Investor in acquiring debt securities issued under an asset securitisation programme include:- High credit quality Asset securitisation typically results in the securities issued carrying the highest possible credit ratings afforded by the internationally recognized rating agencies.to the Investor. .