2. • 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)
• 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
4. PLAYERS INVOLVED IN SECURITIZATION
• Originator: An entity making loans to borrowers or having receivables
from customers
• Special Purpose Vehicle: The entity which buys assets from Originator
and packages them into security for further sale
• 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 undersubscription
5. • Obligors: Company that gives debt to other company as a result of
borrowing
• 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. ORIGINATOR AND ITS ROLE
• 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 AND ITS ROLE
• Opportunity to potentially earn a higher rate of return
• Opportunity to invest in a specific pool of high quality credit-
enhanced assets
• Portfolio diversification
• 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. WHAT CAN BE SECURITIZED
All sorts of assets are securitized
• Auto loans
• Student loans
• Mortgages
• Credit card receivables
• Lease payments
• Accounts receivable
10. BENEFITS SECURITIZATION
• 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
