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22/09/2010,[object Object],SECURITIZATION,[object Object],PRESENTED BY,[object Object],Saketkumar,[object Object]
SECURITIZATION,[object Object],It stands for conversion of loans or loan recoveries into marketable paper or securities by SPV.,[object Object],By pooling assets, it diversifies and reduces risks of the portfolio and, with additional credit enhancement arrangement, can produce highly creditworthy instruments to market.,[object Object],Isolating and efficiently allocating the risk.,[object Object],It is selling the rights to cash flow from loans etc .,[object Object]
SECURITIZATION PROCESS ,[object Object],Selection of assets by the Originator ,[object Object],Packaging of  pool of loans and advances (assets) ,[object Object],Underwriting by underwriters. ,[object Object],Assigning or selling to of assets to SPV in  return for cash ,[object Object],Conversion of the assets into divisible securities ,[object Object],SPV sells them to investors through private  stock market in return for cash ,[object Object],Investors receive income and return of capital  from the assets over the life time of the securities ,[object Object],The risk on the securities owned by investors is  minimized as the securities are collateralized by  assets ,[object Object],The difference between the rate of the borrowers  and the return promised to investors is the  servicing fee for originator and the SPV .,[object Object],Assets to be securitized to be homogeneous in terms of underlying assets ,maturity period ,cash  flow profile,[object Object]
STRUCTURE OF SECURITIZATION,[object Object]
PLAYERS  INVOLVED IN SECURITIZATION,[object Object],1.     Originator: An entity making loans to borrowers or having receivables from customers,[object Object], 2.    Special Purpose Vehicle: The entity which buys assets from Originator and packages them into security for further sale,[object Object],3.   Investment Bank : A body that is responsible for conducting the  documentation work.,[object Object],Credit Rating Agency: To provide value addition to security,[object Object],Insurance Company / Underwriters: To provide cover against redemption risk to investor and / or under-subscription,[object Object],Obligors: Companythat gives debt to other company as a result of borrowing.( debtor),[object Object],Investor: The party to whom securities are sold .,[object Object]
SPV AND ITS ROLE ,[object Object],It is a legal entity created to fulfill the narrow, specific or temporary objectives. ie funding the assets.,[object Object],SPV are typically used by companies to isolate the firm from financial risk and allow other investors to share the risk.,[object Object],Intermediary ,[object Object],Helps in the pooling process ,[object Object],Holding of pooled securities as a repository ,[object Object],Bankruptcy remote transfer ,[object Object]
WHY  ORIGINATOR  SECURITIZE ,[object Object],Off-balance sheet financing – remove illiquid assets.,[object Object],Improves capital structure,[object Object],Extends credit pool,[object Object],Reduces credit concentration,[object Object],Risk management by risk transfers,[object Object],Avoids interest rate risk,[object Object],Improves accounting profits,[object Object]
 INVESTOR VIEW POINT  ,[object Object],ADVANTAGE,[object Object], Opportunity to potentially earn a higher rate of return .,[object Object],Opportunity to invest in a specific pool of high quality credit-enhanced assets .,[object Object],Portfolio diversification .,[object Object],     DISADVANTAGE,[object Object],Prepayment by borrowers can lessen the earning through interest.,[object Object],Currency interest rate fluctuations  which affect the floating rates on ABS.,[object Object],Maintenance obligations of the collateral are not met as given in the prospectus.,[object Object]
CATEGORY OF SECURITIZATION,[object Object],Assets backed securities :Those securities whose income is derived from pool of underlying assets. ,[object Object],    Example:  payments from car loan, credit card. ,[object Object],Mortgage backed securities: Mortgage loans are purchased from banks and assembled into pools which become securities.,[object Object],Credit debt obligation:  ,[object Object],     CBO: Those backed b corporate bonds.,[object Object],     CLO: Those backed by leveraged home loans.,[object Object]
EXAMPLE OF SECURITIZATION IN INDIA,[object Object],First securitization deal in India between Citibank and GIC Mutual Fund in 1991 for Rs 160 million.  ,[object Object],L&T raised Rs 4,090 mln through the securitization of future lease rentals to raise capital for its power plant in 1999.,[object Object],Securitization of aircraft receivables by Jet Airways for Rs 16,000 mn in 2001 through offshore SPV. ,[object Object], India’s largest securitization deal by ICICI bank of Rs 19,299 mn in 2007. The underlying asset pool was auto loan receivables ,[object Object]
WHAT CAN BE SECURITIZED,[object Object],All sorts of assets are securitized:,[object Object],Auto loans,[object Object],Student loans,[object Object],Mortgages,[object Object],Credit card receivables,[object Object],Lease payments,[object Object],Accounts receivable.,[object Object]
BENEFITS  TO FINANCIAL ENVIRONMENT,[object Object],This bring the financial market and capital market together and hence increase the power of capital market.,[object Object],The securitization reduces the risk for the creditor so it will lead the lower cost of funding.,[object Object],Agency and intermediation cost is reduced.,[object Object],The rate of assets turnover in market increases. HFCs do securitize due  to this the volume of the resources increases.,[object Object],Component risk (credit ,liquidity, catastrophe) are segregated and distributed to the market intermediaries which absorb them and make market stable.,[object Object]
Presentation on securitization
The Subprime Mortgage Securitization Process,[object Object],Warehouse Lender,[object Object],(makes short term loans to Issuer for purchase of mortgages),[object Object],Credit Rating Agency,[object Object],Requests loan,[object Object],Bank/Financial Institution,[object Object],(Originator),[object Object],Mortgagor,[object Object],(Borrower),[object Object],Arranger/,[object Object],Issuer,[object Object],Providesloan,[object Object],Loan sold,[object Object],Loans pooled and sold to Trust,[object Object],SPV,[object Object],(Trust),[object Object],Makes loan payments,[object Object],Provides customer service to borrower,[object Object],Servicer,[object Object],(is employed by Trust to collect loan payments etc.),[object Object],issues securities,[object Object],Remits loan payments to Trust and advances unpaid interest payments.,[object Object],Investors,[object Object],Adapted from: “Understanding the Securitization of Subprime Mortgage Credit’” Ashcraft and Schuermann, Federal Reserve Bank of New York Staff Report 318, March 2008.,[object Object]
Presentation on securitization

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Presentation on securitization

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