SECURITIZATION

It stands for conversion of loans or loan recoveries into marketable paper or securities by SPV. By pooling assets, it diversifies and reduces risks of the portfolio and, with additional credit enhancement arrangement, can produce highly creditworthy instruments to market. Isolating and efficiently allocating the risk. It is selling the rights to cash flow from loans etc .

Selection of assets by the Originator Packaging of pool of loans and advances (assets) Underwriting by underwriters. Assigning or selling to of assets to SPV in return for cash Conversion of the assets into divisible securities SPV sells them to investors through private 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 collateralized by assets The difference between the rate of the borrowers and the return promised to investors is the servicing fee for originator and the SPV . Assets to be securitized to be homogeneous in terms of underlying assets ,maturity period ,cash flow profile

STRUCTURE OF SECURITIZATION

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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 Investment Bank : A body that is responsible for conducting the documentation work. Credit Rating Agency: To provide value addition to security.

5 Insurance Company / Underwriters: To provide cover against redemption risk to investor and / or under-subscription. 6 Obligors: Company that gives debt to other company as a result of borrowing.( debtor) 7 Investor: The party to whom securities are sold .

It is a legal entity created to fulfill the narrow, specific or temporary objectives. ie funding the assets. SPV are typically used by companies to isolate the firm from financial risk and allow other investors to share the risk. Intermediary Helps in the pooling process

ADVANTAGE Opportunity to potentially earn a higher rate of return . Opportunity to invest in a specific pool of high quality credit-enhanced assets . Portfolio diversification .

Assets backed securities :Those securities whose income is derived from pool of underlying assets. Example: payments from car loan, credit card. Mortgage backed securities: Mortgage loans are purchased from banks and assembled into pools which become securities.

First securitization deal in India between Citibank and GIC Mutual Fund in 1991 for Rs 160 million. L&T raised Rs 4,090 mln through the securitization of future lease rentals to raise capital for its power plant in 1999. Securitization of aircraft receivables by Jet Airways for Rs 16,000 mn in 2001 through offshore SPV. Indias largest securitization deal by ICICI bank of Rs 19,299 mn in 2007. The underlying asset pool was auto loan receivables

All sorts of assets are securitized: Auto loans. i) Prime auto ABS. ii) Non-prime ABS. iii) Sub- prime ABS

Credit card receivables

Credit Rating Agency

Requests loan

Mortgagor (Borrower)
Makes loan payments

Provides loan

Bank/Financial Institution (Originator)

Loan sold

Arranger/ Issuer

Loans pooled and sold to Trust

Provides customer service to borrower

Servicer (is employed by Trust to

collect loan payments etc.) Remits loan payments to Trust and advances unpaid interest payments.

SPV (Trust)
issues securities

Investors