Securitisation of financial assets (2).ppt

SECURITISATION OF
FINANCIAL ASSETS
POONAM MISHRA
LL.M, NALSAR UNIVERSITY.
P.hD. Scholar , GITAM UNIVERSITY

SECURITISATION OF FINANCIAL
ASSETS
Why Securitisation:
1. A convenient mechanism to suit changing
needs of borrowers and lenders
2. Matches supply of funds with demand
demands for funds through floating
negotiable securities
3. Shifts the source of repayment from earning
to a pool of assets

ASSETS
Genesis and Growth:
1. Severe financial crisis faced by certain states
in US during 1969-70
2. Federal government restriction on inter-state
lending and borrowing
3. Raised funds from surplus states by issuing
instruments backed by mortgaged properties

ASSETS
Elements of Securitisation:
1. Conversion of existing illiquid assets like
loans, advances and receivables into tradable
security
2. Reconverting them into fresh assets through
capital market operations

ASSETS
Benefits of Securitisation:
1. Separates the credit risk of the assets from
the credit risk of the Originator
2. Lower the cost of borrowing for Originator
as the security is independent of the rating of
the corporate securitising these assets
3. Illiquid assets converted into marketable
securities and thus provide alternate funding
source

ASSETS
Benefits of Securitisation : (contd)
4. Remove assets from balance sheet and thus
improve capital adequacy
5. Operations in a particular portfolio of assets can
be increased without increasing total exposure
6. Creates a highly diversified portfolio in terms of
assets and geography (seanoning)
7. Dependability of cash flows from the assets as
signified by the ageing of the portfolio

ASSETS
The Players and their Role:
1. Originator: An entity making loans to borrowers or
having receivables from customers
2. Special Purpose Vehicle: The entity which buys assets
from Originator and packages them into security for
further sale
a. Bankruptcy remote
b. Separates the risk of assets from the credit risk of the seller
3. Credit Enhancer: To reduce the overall credit risk of a
security issue by providing senior subordinate structure,
over-collateralization or a cash collateral

ASSETS
The Players and their Role: (contd)
4. Credit Rating Agency: To provide value
addition to security
5. Insurance Company / Underwriters: To provide
cover against redemption risk to investor and /
or under-subscription
6. Obligors: Whose debts and collateral constitute
the underlying assets of securitisation
7. Investor: The party to whom securities are sold

ASSETS
Requirements for Eligible Collaterals:
1. Assets to be securitised to be homogeneous in
terms of:
2. Underlying assets
3. Maturity period
4. Cash flow profile

ASSETS
Eligible Collaterals:
1. Housing finance
2. Term loan finance
3. Car loan
4. Credit card receivables
5. Export credit
6. Etc.

ASSETS
Structure of Securitisation:
1. Pass Through Certificates:
 Sale of asset to SPV
 Investors purchase interest in the assets of
SPV
 Cash flow (interest and principal) passed
through as and when occurred without any
reconfiguration
 Payments made are most often on monthly
basis
 Reinvestment risk carried by investor

ASSETS
2. Pay Through Certificates:
 Sale of assets to SPV
 SPV issues a debt security collateralized by
asset cash flows
 Cash flows (interest and principal) reconfigured
to suit the requirements of the investors i.e.
based on the maturity period of the security
 Reinvestment risk carried by SPV
 Each trench is redeemed one at a time
 Payments would be at different time intervals
than the flows from the underlying assets

ASSETS
Instruments:
Depending on the structure of securitisation, the
instrument would be pass-through certificate
(PTC), a promissory note, a bond or debenture.
1. The PTC passes the cash flows from borrowers
in the same form to investors. However,
negotiability is restricted as the investor has to
return the PTC to SPV
2. Promissory note / bonds / debentures make
available different tenor maturities and yield to
different investors

ASSETS
Securitisation Process:
1. Selection of assets by the Originator
2. Packaging of designated pool of loans and
advances (assets)
3. Underwriting by underwriters
4. Assigning or selling to of assets to SPV in
return for cash
5. Conversion of the assets into divisible
securities

ASSETS
6. SPV sells them to investors through private
placement or stock market in return for cash
7. Investors receive income and return of capital
from the assets over the life time of the securities
8. The risk on the securities owned by investors is
minimized as the securities are collateralisied by
assets
9. The difference between the rate of the borrowers
and the return promised to investors is the
servicing fee for originator and SPV

ASSETS
Legislations / Enactments and their impact on securitisation
transactions:
The Companies Act 1956 affect the SPV in the following
manner:
1. Framing of Memorandum and Article of Association of
the SPV and formation of SPV as a Limited Company
2. Management of affairs viz. Board of Directors,
Borrowing Powers / delegation of powers for recovery of
receivables etc.
3. Share Capital Structure
4. Issuance of Bonds / Debentures etc. to investors (whether
by public issue or private placement) and servicing the
investors

Securitisation of financial assets (2).ppt

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