22/09/2010 SECURITIZATION PRESENTED BY Saketkumar
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 assets ,maturity period ,cash flow profile
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. Credit Rating Agency: To provide value addition to security Insurance Company / Underwriters: To provide cover against redemption risk to investor and / or under-subscription Obligors: Companythat gives debt to other company as a result of borrowing.( debtor) Investor: The party to whom securities are sold .
SPV AND ITS ROLE 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 Holding of pooled securities as a repository Bankruptcy remote transfer
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. Credit debt obligation: CBO: Those backed b corporate bonds. CLO: Those backed by leveraged home loans.
EXAMPLE OF SECURITIZATION IN INDIA 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. India’s largest securitization deal by ICICI bank of Rs 19,299 mn in 2007. The underlying asset pool was auto loan receivables
WHAT CAN BE SECURITIZED All sorts of assets are securitized: Auto loans Student loans Mortgages Credit card receivables Lease payments Accounts receivable.
BENEFITS TO FINANCIAL ENVIRONMENT This bring the financial market and capital market together and hence increase the power of capital market. The securitization reduces the risk for the creditor so it will lead the lower cost of funding. Agency and intermediation cost is reduced. The rate of assets turnover in market increases. HFCs do securitize due to this the volume of the resources increases. Component risk (credit ,liquidity, catastrophe) are segregated and distributed to the market intermediaries which absorb them and make market stable.
The Subprime Mortgage Securitization Process Warehouse Lender (makes short term loans to Issuer for purchase of mortgages) Credit Rating Agency Requests loan Bank/Financial Institution (Originator) Mortgagor (Borrower) Arranger/ Issuer Providesloan Loan sold Loans pooled and sold to Trust SPV (Trust) Makes loan payments Provides customer service to borrower Servicer (is employed by Trust to collect loan payments etc.) issues securities Remits loan payments to Trust and advances unpaid interest payments. Investors Adapted from: “Understanding the Securitization of Subprime Mortgage Credit’” Ashcraft and Schuermann, Federal Reserve Bank of New York Staff Report 318, March 2008.