2. Definition:
Securitization is the process of pooling and
repackaging of homogeneous illiquid
financial assets into marketable securities
that can be sold to investors.
3. Process of Securitization:
Assets are originated through receivables, leases,
housing loans or any other form of debt by a
company and funded on its balance sheet.
Once suitably large portfolio of assets is
originated, the assets are analysed and as a
portfolio and then sold to a third party.
The administration of assets is subcontracted to
the originator by the SPV.
The SPV issues tradable securities to fund the
purchase of assets.
4. Contd….
The SPV agrees to pay any surpluses which, may
arise during its funding of assets, back to the
originator.
As cash flow arise on the assets, these are used by
the SPV to repay funds to the investors in the
securities.
5. Credit Enhancement:
Credit Enhancement refers to the various
means that attempt to buffer the investors
against losses on the assets collateralising
their investment.
Often required to secure high credit rating
and for low cost of funding.
6. Types of Credit Enhancement:
External Credit Enhancement:
Insurance
Third Party Guarantee
Letter of Credit
