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Presentation on the concept of

* Securitisation *

Flow of Presentation
Definition of Securitisation
Parties to Securitisation
Process of Securitisation
Pass and Pay Through Structure
Motivation and Benefits
Scope of Securitisation
Constraint of Securitisation in India
Case Study: NHB - HDFC RMBS Issue

Definition of
Securitisation
Securitization is the process of pooling and
repackaging

of

homogenous

illiquid

financial

assets into marketable securities that can be sold


to investors.
"Selling the Cash flow generated from the assets
(either existing or future) against the charge of

Parties to Securitisation
Primary Parties :
The SPV
The Investors
The Originator

Parties to Securitisation
Other Parties: The Obligor(s)
The Rating Agency
Administrator or Servicer
Agent and Trustee
Structurer

What type of assets


can be securitised ?
Existing assets in the form of Long Term Receivables
( E.g. Housing Loans)
Existing assets in the form of Short Term Receivables
( E.g. Credit Card Receivables)
Existing physical assets in the nature of
Current Assets (E.g. Stock)
Existing Fixed Assets (E.g. Aircraft Lease)
Future Receivables (Infrastructure projects)

The Procedure
Selection and pooling of assets

These assets are sold or pass through


another orgn called Special Purpose Vehicle(SPV)

The SPV then splits the pool into units/securities


sells them to the investors at large and reimburses it.

Securitisation
Process
Obligor (s)

Ancillary Service
Providers

Interest &
Principal

Original
Loan

Credit Enhancement,
Liquidity Adjustment,etc.

Sale of Assets

Originator

SPV (Assignee &


Issuer)

Consideration for
assets purchased

Issue of Securities
Servicing of
Securities

Investors
Subscription
of Securities

Credit Rating of Securities

Rating Agency

Structurer

Guarantee for
Timely Payment

Guarantor

Process of Securitisation
Estimation of the Cash Flows
Creation of SPV
SPV issues securities/notes to Investors
Investors - Proceeds of the issue of

securities to SPV
Collection

Obligors

and

Servicing

from

the

Process of Securitisation

Pass Over to the SPV


Reinvestment of Cash Flows
Through Structure)
Payment to the Investors
Originators Residuary Profit

(Pay

Pass Through Structure

Pay Through Structure

Motivation and Benefits


Capital relief
Capital planning
Capital requirement
Recognising profits
Changing the timing of income
Raising funds at cheaper rates
One time fee income

Motivation and Benefits


Influence on financial ratios
Providing Market Access
Overcoming constraints of Market
Segmentation
Strategic tool
Liquidity

Motivation and Benefits

Risk Tranching / Unbundling


Asset-Liability Management
Diversification of assets
Systems/Reporting
Pooling

Scope of Securitisation

Mortgage Backed Securities (MBS)


Asset Backed Securities (ABS)
Securitisation of infrastructure
receivables
Future Receivables

Major Constraint of Securitisation in


India
Legal Issues
Taxation Issues
Accounting Issues
Lack of Third Party Servicers
Lack of data across economic cycles
Lack of sophisticated Information Systems
Co-mingling of cashflows

NHB - HDFC RMBS Issue

Issue Structure
Class A PTC of the loan originated from
HDFC

in

the

state

of

Gujarat,

Maharashtra, Karnataka and Tamilnadu


amounting to Rs. 59.7 Crores.
Tenure of the Class A PTCs is 83 months.
Interest Rate to be determined through
Book Building route (11.35% to 11.85%).
Listing in the Wholesale Debt Market of
NSE.

Issue Structure
Rating "AAA (so)" by CRISIL.
Interest on Application Money 10%.
Deemed date of Allotment - 1st
September 2000.
Interest and Principal Payment
Dates - 1st Business working day of
the every month.

Salient Features of the Issue


Isolation of the assets from the Originator by
forming a SPV by NHB.
"Legal True Sale" of assets to an SPV.
"Bankruptcy Remoteness" from the Originator.
Issuance of securities collateralized by the
underlying assets by the SPV to investors.
Reliance by the Investors of the performance
of the assets for the repayment - rather than
the credit of the Originator (HDFC) or the
issuer (the SPV).

Salient Features of the Issue


NHB will act as sole Trustee and will
hold and administer the receivables as
Trust property for the benefit of the PTC
holders.
HDFC will act as Servicing and Paying
Agent (S&P Agent).
Credit Rating by CRISIL as "AAA (so)".
PTC to be listed on 'WDM" at NSE.
PTC issued in the state of Karnataka.

Hierarchy of Payments
Class A principal.
Fees to Service Providers - Trustee, Servicing

and Paying Agent, Rating Agency, legal and


other out-of-pocket expenses, if any, in the
said Order.
Class A interest.
Fees to HDFC towards 'Corporate Guarantee'

provided as a Credit Enhancement.


Class B principal (only after retiring Class A

PTCs).
Class B income.

Pool Selection Criteria


The loans were current at the time of
selection.

The loans have a minimum seasoning of 1


months.

The pool consists of Mortgage loans in the


state of Gujarat, Maharashtra, Tamilnadu
and Karnataka.
All the borrowers in the pool are
individual.

Pool Selection Criteria


Maximum LTV ratio is 80%.
EMI to Gross Income ratio is less than 40%.
EMIs should not be outstanding for more than one
month.
Loan size is in the range of Rs. 18,000 to Rs. 10 Lakhs.
Borrowers in the pool have one loan contract with the
HFC.
The HFC has not taken any refinance with respect to
these loans.
Loans are free from any encumbrances/charge on the
date of selection.

Credit Enhancements
Subordinated Class B PTC
payouts
Corporate Guarantee Structure
of HDFC

Case Study - SICOM


Limited
ST Deferral

GoM
Disc. Rate X%

SICOM

Fees

Pvt. Cos.
Repayments Future Cash Inflows

SPV

Funds Management
Fees

Credit
Rating
Agency

Treasury

Deb. @ X%-Fees-Exps.-Exp. Returns

Investors