Debt Securitization

Dr. Yamini Sharma

D.M.S.
What is securitization
Securitization of debt or asset refers to the
process of liquidating the illiquid and long
term assets like loans and receivables of
financial institutions like banks by issuing
marketable securities against them.
In Other words, debt securitirization is a
technique by which a long-term, non-
negotiable and high-valued financial asset like
hire purchase is converted into securities of
small values which can be tradable in the
market just like shares.
The different entities-:
Originator
The original lender is called the originator.
It is the entity on whose books the assets to be securitized
exist.
Typically, the Originator is a bank, a Non-banking finance
company(NBFC), a housing finance company or, occasionally
even a manufacturing/service company.

Obligor
The Obligor(s): The Obligor is the Originator's debtor (borrower
of the original loan).The amount outstanding from the Obligor
is the asset that is transferred to the SPV. The credit standing of
the Obligor(s) is of paramount importance in a securitization
transaction


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Special Purpose Vehicle
SPVs are companies with small capital, or sometimes trusts,
formed for the specific purpose of issuing securities in
securitization transactions whose ownership and management
are independent of the Originator.
In order to ensure that the assets actually achieve the
bankruptcy remoteness, it is essential to move them out of the
balance sheet of the Originator and park them with another
independent entity.

The SPV is critical in a securitization transaction because it is this

entity that delinks the credit of the entity seeking funding from the
creditworthiness of the securities that are created in a securitization

Servicer
The servicer collects the moneys due from individual borrowers in
the pool, makes payouts to the investors and follows up on
delinquent accounts.
The servicer also furnishes periodic information to the rating
agency and the trustee on pool performance.


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Trustee
The trustees have a fiduciary role to oversee the performance of the
transaction until maturity with a view to protect the interest of the
investors.
Trustees tend to be reputed banks, financial institutions or firms of
Chartered Accountants or Solicitors.
Rating Agency
Credit rating agencies rate the securities which are issued to provide
an external perspective on the liabilities being created and help the
investor make a more informed decision.
The rating process would assess the strength of the cash flow and
the mechanism designed to ensure full and timely payment by the
process of selection of loans of appropriate credit quality, the extent
of credit and liquidity support provided and the strength of the legal
framework.


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Structurer
Normally, an investment banker is responsible as
structurer for bringing together the Originator,
credit enhancer/s, the investors and other
partners to a securitization deal. It also works with
the Originator and helps in structuring deals.

Types of Securitization:

Asset Backed securities (ABS) :
Mortgage Backed Securities (MBS)
Collateralized Debt Obligation (CDO) :
Collateralized Loan Obligations :

Collateralized Bond Obligations :

Asset Backed securities (ABS) :

ABS refers to the securitization of
non-mortgage retail loans. Till the
late 1990s, assets classes securitized
under ABS in India included only car
loans and commercial vehicle loans.
Thereafter, construction equipment
loans, two wheeler loans, utility
vehicle loans, and personal loan
pools, have also been securitized.


Mortgage Backed Securities (MBS)
(MBS) are asset-backed securities whose cash flows are
backed by the principal and interest payments of a set of
mortgage loans.
Since the underlying home loans in MBS pool have a floating-
rate, the scheduled cash flow on such pools is uncertain and
liable to change, depending on actual interest rate.
Moreover, options to convert from fixed to floating rate and
vice-versa, coupled with negotiated re-pricing of loans,
added to the uncertainty of the cash flow in the MBS pool.
With the underlying loans earning floating rates, Pass
Through Certificates (PTCs) in MBS issues are also being
predominantly priced on a floating rate basis. In 2005, 52% of
issuance was based on a floating rate.
Collateralized Debt Obligation (CDO) :
In CDO transactions, the debt securities issued by the SPV are backed by a
diversified loan or bond portfolio. There is thus a basic difference between
CDOs and ABS, the latter being homogeneous pools of assets such as
mortgages or credit card receivables, in contrast to the diversified portfolios
backing CDOs.

Collateralized Loan Obligations :
Where the originating bank transfers a pool of loans, the bonds that
emerge are called collateralized loan obligations or CLOs.

Collateralized Bond Obligations :
Where the bank transfers a portfolio of bonds and securitizes the same,
the resulting securitized bonds could be called collateralized bond
obligations or CBOs.


Securitisable Assets
Term loans to financially reputes companies
Receivables from govt. departments and
companies
Credit and receivables
Hire purchase loans like vehicle loans
Lease finance
Mortgage loan
Benefits of securitization
Additional Source of fund
Greater profitability
Enhancement of capital adequacy ratio
Spreading of credit risk
Lower cost of funds
Higher rate of return
Prevention of idle capital


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Securitisation in India began in the early 1990s, with CRISIL rating the first securitisation
program in 1991-92, of an auto loan. Citibank securitized auto loans and placed a paper with
GIC mutual fund worth about Rs. 16 crores.

Securitisation began with the sale of consumer loan pools, and originators directly sold loans to
buyers. They acted as servicers and collected installments due on the loans.

Creation of transferable securities backed by pool receivables (known as PTCs) became
common in late 1990s. Through most of the 90s, securitisation of auto loans was the mainstay
of the Indian markets.

Initially it started as a device for bilateral acquisitions of portfolios of finance companies.
These were forms of quasi-securitisations, with portfolios moving from the balance sheet
of one originator to that of another.

But from 2000 till today, Asset-Backed Securities (ABS) and Residential Mortgage-Backed
Securities (RMBS) have fuelled the growth of the Indian securitisation market.
HISTORY OF SECURITISATION IN INDIA


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Causes for unpopularity of
securitisation in India
New Concept
Heavy Stamp duty and registration fee for SPV
Difficulty in assignment of debt
Absence of standardized loan documentation
Absence of proper accounting procedure
Absence of proper guidelines