24-11-2012, 05:21 PM
SECURITIZATION
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SECURITIZATION PROCESS
Selection of assets by the Originator
Packaging of pool of loans and advances (assets)
Underwriting by underwriters.
Assigning or selling to of assets to SPV in return for cash
Conversion of the assets into divisible securities
SPV sells them to investors through private stock market in return for cash
Investors receive income and return of capital from the assets over the life time of the securities
The risk on the securities owned by investors is minimized as the securities are collateralized by assets
The difference between the rate of the borrowers and the return promised to investors is the servicing fee for originator and the SPV .
Assets to be securitized to be homogeneous in terms of underlying assets ,maturity period ,cash flow profile
PLAYERS INVOLVED IN SECURITIZATION
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
3. Investment Bank : A body that is responsible for conducting the documentation work.
Credit Rating Agency: To provide value addition to security
Insurance Company / Underwriters: To provide cover against redemption risk to investor and / or under-subscription
Obligors: Company that gives debt to other company as a result of borrowing.( debtor)
Investor: The party to whom securities are sold .
SPV AND ITS ROLE
It is a legal entity created to fulfill the narrow, specific or temporary objectives. ie funding the assets.
SPV are typically used by companies to isolate the firm from financial risk and allow other investors to share the risk.
Intermediary
Helps in the pooling process
Holding of pooled securities as a repository
Bankruptcy remote transfer
WHY ORIGINATOR SECURITIZE
Off-balance sheet financing – remove illiquid assets.
Improves capital structure
Extends credit pool
Reduces credit concentration
Risk management by risk transfers
Avoids interest rate risk
Improves accounting profits
INVESTOR VIEW POINT
ADVANTAGE
Opportunity to potentially earn a higher rate of return .
Opportunity to invest in a specific pool of high quality credit-enhanced assets .
Portfolio diversification .
DISADVANTAGE
Prepayment by borrowers can lessen the earning through interest.
Currency interest rate fluctuations which affect the floating rates on ABS.
Maintenance obligations of the collateral are not met as given in the prospectus.