Asset Securitization

Securitization
• Securitization is “the issuance of
marketable securities backed by the
expected cash flows from specific assets
(receivables)”
 Parties to an issue
The initial owner of the loans.
Originator Sells them to the SPV

SPV Set up specifically for transaction.

Purchases assets from Originator.
Special purpose
Company/Trust/ Mutual Fund
Vehicle

The loan customers.

Obligors Pay cashflows that are securitised

Subscribe to securities
Investors issued by SPV
 Parties to an issue (contd.)
Collects money from Obligors,
Collection monitors and maintains assets.
Agent Usually the originator

Provides a rating for the deal

Credit Rating based on structure, rating of parties
Agency & portfolio, legal and tax opinion et

Credit Provides credit enhancement

by way of swaps, hedges,
Enhancement
guarantees, insurance etc.
Provider
As structurer for designing &
Merchant executing the transaction and
Banker as arranger for the securities
 Generic deal diagram
Credit
Obligors Enhancement
Providers
2 Collections 3Credit enhancement
Original 9 Issue of securities
1 Cash flows
Loan
10 11 Servicing
Collection Sale of SPV of securities Investors
Agent asset 6
4 Rating 8 Subscription to securities
Originator 7
Purchase Rating
consideratio Agency Arranger
n
5 Contracts
Ongoing cash flows
Initial cash flows
Structurer
 Why securitize assets?

• More efficient financing

• Improved balance sheet structure
• Better risk management
 What type of assets can be
securitized?
• Any type of asset with a reasonably
predictable stream of future cash flows
can be securitized.
• Assets that are easiest to securitize are
those: that occur in large pools; for which
past experience can be used to predict
default rates; for which documentation is
standardized; and for which ownership is
transferable.
 Types of Securitization
• MBS (Mortgage based securitization )

• ABS (Asset based securitization)

 Benefits to Originator
• Off balance sheet financing
• Regulatory capital relief
• Improvement of RoCE
• Multiple alternative sources of funding
• Conversion of illiquid assets into liquid
securities
• Systemically solves ALM problems in the
sector - mismatch due to difference in tenor
and characteristics of assets (mostly fixed
rate and up to 30 years) and liabilities
 Benefits to Investor
• Enjoys low cost operations and servicing
due to economies of scale of the originator
• Credit risk is minimized
– Exposure on rated, low-risk housing loans
– Expertise of originators helps maintain quality
of underlying assets
– Credit enhancement possible
Benefits to Financial System
• Cleaner books due to expertise of
originators
• Systemically solves the ALM problems
in the sector
• Encourages an efficient market
• Results in substantial benefits to the
end customer of home loans
What is required for a successful
asset securitization?
• Robust financial infrastructure
– The Legal Environment
– The Accounting Environment
– The Regulatory Environment
– The Taxation Environment
– Back-office Systems
 Drivers of Strong Investor Demand

 Receivables are sufficient to meet the payments

promised by the SPV

 Safeguards exist to provide for shortfalls in cash

from receivables

 Investors have clear legal claims on the income

from receivables and have adequate protection
in the case of delinquency.
 Strong Investor Demand contd…

• Credit Enhancement
– Third Party Guarantees
– Subordinated debt
– Over-Collateralization
– Cash Collateral Accounts
 SECURITISATION -INDIAN
CONTEXT
• First deal in India between Citibank and GIC Mutual Fund, in 1990
for Rs. 160 million.
• Securitisation of cash flow of high value customers of Rajasthan
State Industrial and Development Corporation in 1994-95,
structured by SBI cap.
• Securitisation of overdue payments of UP government to HUDCO
by issue of tax-free bonds worth Rs. 500 million
• Securitisation of Sales Tax deferrals by Government Of
Maharashtra in August 2001 for Rs. 1500 million with a green
shoe option of Rs. 75 million.
• First deal in power sector by Karnataka Electricity Board for
receivables worth Rs. 1940 million and placed them with HUDCO.
• Mega securitisation deal of Jet Airways for Rs. 16000 million
through offshore SPVs.
• Data indicate that ICICI had securitised assets to the tune of Rs.
27500 million in its books at end March 1999.
Some of the companies that have been
Involved in this are
• Ashok Leyland finance
• Cholamandalam investment & finance
• Esanda finance
• Sakthi finance
• Tata finance
• SRF finance
 MBS - A Win-Win for All
• Originators
– Churn higher returns on lower capital base
• Investors
– Can invest in low-risk rated home loans paper without
hassles of origination/ servicing
• Financial system as a whole
– Expertise of Specialists helps maintain quality of
underlying assets and reduces ALM mismatches
• Home Loan Customers
– Access to cheaper funds
 Committee involved in
Securitization
• Narasimham committee I & II

• Andhyarujina committee

– Recommendations made by them

• Empower banks & FI’s to take the possession of
the assets & to sell them wihout the intervention of
the court, was enacted.
 When the bill was passed?
• The Securitisation and Reconstruction of
Financial Assets and Enforcement of
Security Interest Ordinance, 2002. on
21.06.2002.
• It received the assent of the President on
17.12.2002 and has now become an Act.
Thank you………