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Presentation on securitization

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In this PPT i covered the processs of securitization, issues inv

In this PPT i covered the processs of securitization, issues inv


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  • 1. 22/09/2010
    SECURITIZATION
    PRESENTED BY
    Saketkumar
  • 2. 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 .
  • 3. 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
  • 4. STRUCTURE OF SECURITIZATION
  • 5. 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 .
  • 6. 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
  • 7. 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
  • 8. 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.
  • 9. 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.
  • 10. 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
  • 11. WHAT CAN BE SECURITIZED
    All sorts of assets are securitized:
    Auto loans
    Student loans
    Mortgages
    Credit card receivables
    Lease payments
    Accounts receivable.
  • 12. 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.
  • 13.
  • 14. 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.

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