Of Debt

INTRODUCTION

• Definition,

”Securitization s nothing but liquefying assets comprising loans and receivables of an institution through systematic issuance of financial instruments”.

PARTIES IN SECURITIZATION TRANZACTION

ORIGINATOR

SPECIAL PURPOSE VEHICAL (SPV)

INVESTORS / QUALIFIED BUYER

RATING AGENCY

ADMINISTATOR /SERVICER

AGENT AND TRUSTEES

OBLIGATOR

UNDERWRITER

SECURITIZATION PROCESS

WHY SECURITIZED?

• Diversification of funding sources

• Enhance liquidity

• Reduce cost of funds

• Enhance strategic profile

• Manage and match asset/liability profile

• Transfer risk and cap the originator’s credit risk

• Encourage best practice

Types of Securitization:

• Asset Backed securities (ABS):

• Mortgage Backed Securities (MBS):

• Collateralized Debt Obligation (CDO):

Risk Involved in Securitization

Counterparty Risk

Investment Risk

Asset Pool Risk

Credit Risk Prepayment Risk Interest

Rate Risk

Liquidity and Price Risk

Reinvestment Risk

Servicer Risk

Commingling Risk

Cash Collateral Risk

Swap Counterparty Risk

Credit Enhancement Methods

External Credit Enhancement Internal Credit Enhancement

Insurance

Third party guarantee

Letter of credit

SWAP Agreement

Credit Trenching

Over- collateralization

Cash collateralization

Benefits of Securitization

• Benefits to Originator/Issuer :

 • Benefits to Investors :

• Benefits to National Economy :

Benefits to Originator/Issuer :

• Raising fund at a cheaper rate

• Increases Borrowing capacity

• Improves Profitability

• Diversification of credit risk

• Reduces Asset-Liability mismatch

• Reduction in CAR requirements

Benefits to Investors

• Portfolio Diversification

• Higher yields and good liquidity

• Flexibility

• Aligned as per investor needs

• Less Volatile

Benefits to National Economy

• Capital market development

• Source Of Capital

• Data Transparency

• Dispersion of financial assets

Threats of securitization

• Passes on database to investors

• Leaves the entity with junk assets

• Costly source

• Uneconomical for lower requirements

Issues facing Indian Securitization Market

• Stamp Duty:

• Foreclosure laws:

• Compulsory registration:

• Lack of investor appetite:

• Eligibility

BIBLOGRAPHY

http://www.vinodkothari.com