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.
 Securitization is a financing technique that allows the corporation to
separate credit origination and funding activities. The technique comes
under the umbrella of structured finance as it applies to assets that
typically are illiquid contracts. It has evolved from tentative beginnings in
the late 1970s to a vital funding source with an estimated total
aggregate outstanding of $8.06 trillion (as of the end of 2005, by the
Bond Market Association) and new issuance of $3.07 trillion in 2005 in
the U.S. markets alone.

Securitization is the process of homogenizing and packaging

financial instruments into a new fungible one. Acquisition,
classification, collateralization, composition, pooling and distribution
are functions within this process
 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. 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.
A typical Securitisation transaction would involve an
entity (the "Seller") selling a pool of assets to a special
purpose vehicle ("SPV"- being a trust or a company). As
the transaction is generally structured as an asset sale,
the assets are removed from the Seller's balance sheet.
The SPV, in order to fund the purchase, would issue
mortgage or asset-backed securities ("MBS/ABS")
which are sold to institutional investors in the domestic
or international capital markets. Investors therefore rely
on the cash flows from the pool of assets (and not the
Seller) for repayment of their investment.

Securitisation separates the risks inherent in any

corporate finance transaction and transfers these risks
from the Seller to the purchaser of assets.
SECURITISATION PROCESS
 SPV

Identification Process Transfer Process

Issue of Security
after Credit Rating
Denomination

Redemption/
Payment
 Types of Securitisation

Securitization has two prototypical transaction types

cash and synthetic

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); purchase is effected by issuing
multiple tranches of securities based on the cash flow generating
capacity of the asset pool.

 In synthetic securitization, the corporation buys a credit

default swap (or, less commonly, a total return swap) on
certain asset exposures as a kind of default insurance for credits
that remain on balance sheet; the swap can be an outright trade
or it can be embedded in the balance sheet of an SPE against
which liabilities are issued.
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, such as insurance
companies, other banks, and unregulated entities. The
transfer may be either funded, for example, by issuing credit-
linked securities in tranches with various seniorities
(“collateralised loan obligations” or CLOs) or unfunded, for
example, using credit default swaps. 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.
 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. However, balance
sheet restructuring via securitization is much harder to effect under
Some accounting practices prevailing in the world.

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
provides an opportunity for diversification. It is worthwile to note that
the entire transaction relating to securitisation is carried out on the
assets side of Balance sheet, that is one asset (loan) is converted into
cash. 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.
Simplified Bank balance sheet before
and after securitisation
Balance sheet before securitisation
Assets Amount Liabilities Amount
Cash reserves $ 5.33 Deposits $ 53.33
Long-term $ 50.00 Capital $ 2.00
Mortgages
Total $ 55.33 Total $ 55.33
Balance sheet after securitisation
Assets Amount Liabilities Amount
Cash reserves $ 5.33 Deposits $ 53.33
Cash proceeds $ 50.00 Capital $ 2.00
from mortgage
Total $ 55.33 Total $ 55.33
 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. 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.

In a basic securitization structure, the originator creates a pool of financial

assets, such as mortgage loans, and then sells these assets to a specially
created investment vehicle that issues bonds backed by those financial assets.
These are asset-backed securities. When investors hold a conventional bond
they get a regular interest payment during the life of the bond, 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, which means that the risk of default is directly linked to the
company's solvency.
In a securitization, these payments depend primarily on
the cash flows generated by the assets in the underlying
pool. This protects ABS investors from losing their money
if the company that originated the financial assets, goes
bankrupt.

While residential mortgages were the first financial assets

to be securitized, non-mortgage related securitizations
have grown to include many other types of financial
assets, such as credit card payments, trade receivables,
leases, auto loans and student loans. The royalty
payments on David Bowie's back catalogue have even
been used as securitizable assets.
  

  What can be Securitised

Securitisation is a financing technique that allows almost any asset, or pool of

assets, that has a reliable, contractual or predictable cash flow to be
repackaged purchased and then funded as debt securities and sold to
 
institutional investors.
The following is a list of the types of assets or cash flow streams that have
been securitised:

Aircraft Leases Franchise Loans

Auto Leases Home Loans

Auto Loans Leases

Business Loans Operating Leases

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
 Benefits of Securitisation
to the Seller...
Diversification of funding sources
A securitisation may provide the Seller with access to a new class of investors and
therefore, source of funds.
Improved financial ratios
As the transaction is generally an asset sale, the Seller's asset base is reduced
which may improve return on assets (ROA) and return on equity (ROE)
without adversely impacting revenue streams. 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.
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.
 to the Investor...
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.

A diversification of investment opportunities

Asset securitisation allows investors to indirectly invest in
a variety of asset classes.