Securitization is the process of combining various financial assets, such as mortgages, car loans, and credit card debt, into securities that are sold to investors. This is done through a special purpose vehicle (SPV) that purchases the assets from their originator and repackages them into new securities backed by those assets. Mortgage-backed securities are a common example, where mortgages are pooled, divided into tiers of risk, and sold as securities. SPVs play an important role by isolating risk, allowing assets to be securitized without affecting the originator, and providing bankruptcy protection for investors.

1. Securitization
By:- Binay Kumar Mishra
Rahul Kumar Sinha
Amitabh Shahi
Amit Abhishek.

2. What is Securitization ?
• Securitization is the process through which an issuer
creates a financial instrument by combining other
financial assets and then marketing different tiers of
the repackaged instruments to investors, and this
process can encompass any type of financial asset and
promotes liquidity in the marketplace.

3. Continued……..
• Mortgage-backed securities are a perfect example of
securitization. By combining mortgages into one large
pool, the issuer can divide the large pool into smaller
pieces based on each individual mortgage's inherent
risk of default and then sell those smaller pieces to
investors.

4. • 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:
CLO: Where the originating bank transfers a pool of loans , the bonds that emerge are
called collateralized loan obligation
CBO: Where the bank transfers a portfolio of bonds and securitizes the same, the
resulting securitized bonds are termed as collateralized bond obligations .
Category of Securitization

5.  ABS and MBS are two types of investment where securities
are pulled and sold to a group of investors. The structure of
both are similar in nature and the key difference between
ABS and MBS on the type of collateral (A pledge to secure
a loan) used for securities. ABS are backed by securities
such as various types of loans, receivables and leases. While
MBS are collateral by mortgages.

6. Difference Between ABS and MBS
ABS
• It is backed by securities such as
Loan, receivables etc.
• These are relatively new
development as compared to MBS.
• These are typically shorter in
duration and more challenging when
it comes to predicting cash flows.
MBS
• It collateralise by mortgages.
• MBS are well stabilised.
• These are comparatively less risky
due to its longer time frame.

7. 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 Mn 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

8. DEBTOR Originator
Special
Purpose
Vehicle
Investors
Liquidity
Support
Credit
Enhancement

9. • 1. Debtor: Company that gives debt to other company as a result of
borrowing.
• 2. Originator: An entity making loans to borrowers or having receivables
from customers.
• 3. Special Purpose Vehicle: The entity which buys assets from Originator
and packages them into security for further sale.
• 4. Investment Bank : A body that is responsible for conducting the
documentation work.
• 5. Credit Rating Agency: To provide value addition to security
• 6. Insurance Company / Underwriters: To provide cover against
redemption risk to investor and / or undersubscription.
• 7. Investor: The party to whom securities are sold .

10. Special Purpose Vehicle
• Special purpose vehicle (SPV) or Special Purpose entity(SPE)
is a financial entity created for the purpose of fulfilling a very
specific and limited use. It is separated from the sponsoring or
parent company for legal and tax reasons, and may be
controlled by several companies working together.
• Special purpose vehicle or Special Purpose entity is
a subsidiary company with an asset/liability structure and legal
status that makes its obligations secure even if the Parent
company goes bankrupt.

11. Special Purpose Vehicle(SPV)
• SPV is an entity specially created for the purpose of executing the process
of Securitization. The Bank/FI transfers the assets in its books to the SPV
which holds the legal title to the assets. It makes the payment to the
Bank/FI for the assets purchased.
• SPVs are mostly formed to raise funds from the market. Technically, an
SPV is a company. It has to follow the rules of formation of a company
laid down in the Companies Act. Like a company, the SPV is an artificial
person , It has all the attributes of a legal person.

12. Role of an SPV
• Special Purpose Vehicles (SPVs) play a major role in financial markets, and are
frequently used for structured finance transactions and asset securitization.
• An SPV acts as a subsidiary company to enable an asset and liability structure as
well as hold up a legal status and secure obligations, on the off chance that a
company goes bankrupt. Hence, it can also be referred to as a bankruptcy remote
entity.
• A company can primarily isolate any risk that its debt or operations may pose, by
transferring the debt off its balance sheet into that of the SPV account.

13. How is an SPV Established?
Like a company, an SPV must have promoter(s) or sponsor(s). Usually, a
sponsoring corporation hives off assets or activities from the rest of the
company into an SPV. This isolation of assets is important for providing
comfort to investors. The assets or activities are distanced from the parent
company, hence the performance of the new entity will not be affected by the
ups and downs of the originating entity. The SPV will be subject to fewer risks
and thus provide greater comfort to the lenders.

14. Advantage of setting up an SPV
• The biggest advantage is that it helps in separating the risk and freeing up
the capital. As a result, the SPV and the sponsoring company are protected
against risks like insolvency, which may arise during the course of
operation. The SPV also allows securitization of assets without disturbing
the managerial relationship. Under the arrangement, any predictable
income stream generated by secure assets can be securitized. According to
some estimates, the worldwide securitization market has increased from
$1.2 billion of transactions in 1985, to $544 billion in 2003.

15. Ratnagiri Gas and Power Pvt Ltd (RGPPL) is a special purpose
vehicle (SPV) formed by GAIL (India) and NTPC to revive the
2,184 MW Dabhol power plant. The SPV will have an equity of
Rs 1,500 crore. The Registrar of Companies has allotted the name
to the SPV and the documents pertaining to incorporation have
been filed. The new company will own and operate the assets of
the erstwhile Dabhol Power Company.
Example