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1.0 SECURITIZATION
Securitization is a process through which illiquid assets are transformed into a more
liquid form of assets and distributed to a broad range of investors through the capital
market. The main steps involved in the process of securitization are as under:
Transfer of assets by the originator to a company/trust specially created for this
purpose known as a Special Purpose Vehicle (SPV).
SPV divides this pool of assets into marketable securities called Pass Through
Certificates and resells them to various investors like banks, MFs, Central or State
Governments or the parent company of SPV.
The issue of securities is managed by a merchant banker or a syndicate of
merchant bankers who also underwrite the issue. Apart from the SPV a trustee is
normally appointed to oversee the process of securitization.
Besides these other parties like obligor, rating agencies, administrator, agent & trustee
and structurer are also often involved in the process.
In fact any resource with predictable cash flows can be securitized. Thus credit card
receivables, hire purchase receivables, non-performing assets of a financial entity can all
be securitized.
Securitization deals help the originator beat the rating given to the company. Air India
has taken advantage of this by managing to beat the sovereign rating by securitization
of its future earning’s over the US market.
It enables the originator to access funds at low cost and take advantage of more
profitable investment opportunities with the revenue generated through securitization.
It enables originators to pass on or eliminate credit, interest rate and lending risks
associated with balance sheet funding. It thus improves asset management and
effectively diversifies credit risk.
By transforming an illiquid asset on the balance sheet into cash, the originator
minimizes the accounting leverage as measured by the debt ratio and thus enables
raising more funds without impairing its borrowing ability.
The originator derives the benefit of an increase in Capital Adequacy Ratio (CAR).
External credit enhancement includes insurance, irrevocable letters of credit, third party
guarantee whereas internal credit enhancement includes spread account, cash collateral
accounts, over – collateralization, credit trenching (senior – subordinated structure) and
triggered amortization.
Non -Recourse securitization: The securitization may be without recourse but the
collateral may be designed to have a bankruptcy remote structure to enjoy all the rights
which the seller would have enjoyed on the leased / hire purchase stock in case of failure
of the customers to pay lease rentals / hire purchase installments. The Banks and FIs who
buy securitized Participation Certificates in fact invests in a special type of debt
instruments that enjoys liquidity (if proper secondary market exists for securitized
instruments) and also accepts reinvestment risk.
Co-operative. The issue opened in the last week of August 2002 and closed on 4 th
September 2002.
The first part against receivables of Rs.76.4 crore loans given L&T had four
series:
First series raised Rs.14.3 crores has a maturity of four months and coupon of 6.65%
payable at the end of this period. CRISIL gave it the highest safety rating of “P1+(SO)”.
Second series raised Rs.12.9 crores has a maturity of 10 months and coupon of 6.85%
payable quarterly. It is also rated “P1+(SO)” by CRISIL.
The third series raised Rs.25.2 crores has a term of 22 months and carries a coupon of
7.6%. CRISIL rated it as “AA+(SO)” indicating high safety.
The fourth series raised Rs.24 crores has a 34 month term and a coupon of 7.85% payable
quarterly. CRISIL rated it as “AA+(SO)”.
The second issue, which raised Rs.215 crores, is against the receivable on loans
given to (NHPC). It has an average maturity of 13 months carries a coupon of
7.4% payable quarterly and CRISIL gave it AA+(SO) rating.
The third issue against the receivables from Indian Farmers Fertilizers Co-
operative has two series.
The first series raised Rs.29.6 crores has a maturity of four months and a coupon of
6.65% to be paid at the end of the period.
The second series raised Rs. 16.2 crores has a maturity of seven months and coupon of
6.85% payable quarterly.
also appointed. Global Trust Bank has been nominated, as the investor’s representative
for the transaction to monitor the ongoing servicing. The certificates are available in
denominations of Rs. 1 crore each and were issued at a coupon of 14% and provide
monthly cash flows of principal and interest for 28 months. Since a portion of the face
value gets redeemed every month, the average duration of the instruments is only 12.2
months. The only recourse to the investors is to deposit in a cash collateral account of 7%
of the issue size.
(payable on monthly basis) for maturity of 8 years and 10 months. The instrument has no
call and put option. The monthly payment started on January, 2000 and continue till
December, 2007. The interest payment for the initial ten months will be amortized. IIDL
will pay in EMI principal and interest. This amount will flow to an escrow account. The
issue of debentures has been reportedly fully subscribed within hours of opening on 12
March, 1999.
The initiatives of these agencies have played a vital role in the development of the
securitization market in USA.
However, there are certain disadvantages also which need to be examined carefully:
For instance during sharp economy contractions, liquidity of securitization may
be illusionary
Securitization can lead to creation of excessive credit
Expectations of consumer behaviour may not be correct, and the cash flows
expected may be different.
European Market
Though USA is widely regarded as the major player in the securitization market Europe
had this market in existence since long. Denmark had a mortgage credit system in place
well before the first securitization deal was struck in the US. Germany has a P&F Brief
Market, which is a secondary mortgage market. The Danish mortgage trading system is
very close in concept to the US concept of pass through. However, securitization in its
modern sense emerged in Europe in late 1980’s with the issuance of mortgage- backed
securities. In Europe, the previous action in the ABS market had centered mainly on
residential mortgages and, to a lesser extent, on the credit card-backed issues that are
popular in international ABS circles (Refer to Annexure 4). Over the years there has
been a certain change in this trend with an increasing proportion of CDOs in the ABS
structure and a decline in RMBS (Refer to Annexure 5). Also, it should be noted that in
Europe, unlike in the United States, all deals use an ABS-structure, making no distinction
between mortgage-backed and asset-backed securities. Initially in MBS UK acted as a
major source of collateral. However, now countries like Germany, Spain etc. have
emerged as major players. The introduction of Euro has further boosted the activities in
the securitization market. There has been a continuing broadening of the types of assets
being securitized - for example, sub-prime mortgages, student loans, soccer receivables,
pub leases etc. thus it augurs well for the future of this market. One major drawback in
Europe is the absence of GNMA, FNMA equivalents thus the growth of the securitization
market depends solely on the needs of savvy issuers and investors. United Kingdom is
the major player in the securitization market in Europe however newer players like
Germany, Italy, Netherlands etc. have also emerged (Refer to Annexure 6). In the future
Europe is likely to see a major boost in securitization activities due to the possibility of
some favourable occurrences like:
Introduction of Euro, which would eliminate much of the sovereign bond markets
thus shifting the investor attention to spread products like MBS and ABS due to
their high credit quality thus eliminating currency concerns.
Several countries have initiated legal and regulatory changes to facilitate this for
instance, German banks are now authorized to securitized their own loans.
Improvements in the MBS deal information reporting systems and greater
familiarity with cash-flow characteristics would lead to greater usage of MBS and
ABS.
There has been an increase in the spectrum of assets, which are being securitized
like sub-prime mortgages, student loans, soccer receivables and so on.
6.0 CONCLUSION
Securitization is a very new concept in the Indian market and there is very little
awareness not only among the investors but also among the financial experts. It has only
been in the past five years or so that there has been tremendous interest in this new tool of
raising money mainly because of the great advantages that it offers. However, for
securitization to take a deep root into the Indian financial system like it is in the USA and
other European countries there are certain fundamental and regulatory changes needed
which have already been outlined above. Nevertheless, one thing is certain securitization
has arrived in India in a big way and is here to stay. Several big financial institutions like
ICICI, HUDCO, IDBI, Citibank etc. have already struck some major deals and in the
recent years there has been an upsurge in the number of such deals. With the removal of
some bottlenecks like heavy stamp duties, strict foreclosure norms, other legal and
regulatory aspects and absence of an active trading market the activity in this segment
would surely pick up.
India in order to emerge as a real global economic power and have truly global
companies needs to adapt itself and take advantage of financial services like debt
securitization as early as possible. The process has already been initiated now it is upto
the authorities to create an environment favourable to the adoption of such an innovative
instrument which has shown spectacular results worldwide. Securitization holds the key
to several crucial problems ailing the Indian economy one of the major ones being
infrastructure financing.
7.0 REFERENCES
1) www.economictimes.com
2) www.vinodkothari.com
3) www.sebi.com
4) www.blonnet.com
5) www.inidiainfoline.com
6) www.securitization.net
7) http://www.securitization.net/pdf/buyusbus_contents.pdf
8) www.icfai.org
9) www.adb.org/Documents/Books/Mortgage_Backed_Securities_Markets
10) Rajashekhar N., “Banking in the new millennium”, Banking series, The Insitute of
Chartered Financial Analysts of India, Hyderabad.
11) Fabozzi Frank J., “The Handbook of fixed income securities”, 5th edition, Mc-
Graw Hill, New York.
12) Gordon E, Natrajan K., “Financial markets and services”, Himalaya Publishing
House, 1st edition 1999, Delhi.
13) ICICI in Largest Securitised Deal with TELCO, News Report, Financial Express ,
Nov. 4. 1997
14) Securitisation yet to take off in India, Hindu, 3 April,1998
15) Asset-backed securitisation all set to catch on in the country, Financial Express,
September 27,1998
16) L&T Strikes Rs.409 Cr Securitised deal with IPCL, News Report, Financial
Express, March13, 1999