Professional Documents
Culture Documents
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 .
SECURITIZATION PROCESS
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
STRUCTURE OF SECURITIZATION
PLAYERS INVOLVED IN
SECURITIZATION
1. Originator: An entity making loans to
borrowers or having receivables from customers
2. Special Purpose Vehicle: The entity which
buys assets from Originator and packages them
into security for further sale
3. Investment Bank : A body that is
responsible for conducting the documentation
work.
4. 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
SPV AND ITS ROLE
It is a legal entity created to fulfill the narrow,
specific or temporary objectives. i.e 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
Holding of pooled securities as a repository
Bankruptcy remote transfer
WHY ORIGINATOR SECURITIZE
Off-balance sheet financing remove
illiquid assets.
Improves capital structure
Extends credit pool
Reduces credit concentration
Risk management by risk transfers
Avoids interest rate risk
Improves accounting profits
INVESTOR VIEW POINT
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 .
DISADVANTAGE
Prepayment by borrowers can lessen the earning
through interest.
Currency interest rate fluctuations which affect the
floating rates on ABS.
Maintenance obligations of the collateral are not met
as given in the prospectus.
CATEGORY OF
SECURITIZATION
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.