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    Securitisaton

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    Avishek Dey A Negative
    Securitization involves selling existing or future receivables to a special purpose vehicle (SPV) that pays for them by issuing securities to investors. The SPV converts illiquid assets like loans or receivables into liquid securities that can be traded. Securitization allows originators like banks to raise funds and rotate assets faster for higher profits, while providing investors with good quality debt instruments. There are two main types: pass-through securities, where investors receive cash flows but bear default risk; and pay-through securities where the SPV commits to regular payments and absorbs default risk. While securitization provides benefits, its use in India has been limited due to higher costs compared to other sources of funding and lack of a

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    Securitisaton

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    Avishek Dey A Negative
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    Securitization involves selling existing or future receivables to a special purpose vehicle (SPV) that pays for them by issuing securities to investors. The SPV converts illiquid assets like loans or receivables into liquid securities that can be traded. Securitization allows originators like banks to raise funds and rotate assets faster for higher profits, while providing investors with good quality debt instruments. There are two main types: pass-through securities, where investors receive cash flows but bear default risk; and pay-through securities where the SPV commits to regular payments and absorbs default risk. While securitization provides benefits, its use in India has been limited due to higher costs compared to other sources of funding and lack of a

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    Securitization involves selling existing or future receivables to a special purpose vehicle (SPV) that pays for them by issuing securities to investors. The SPV converts illiquid assets like loans or receivables into liquid securities that can be traded. Securitization allows originators like banks to raise funds and rotate assets faster for higher profits, while providing investors with good quality debt instruments. There are two main types: pass-through securities, where investors receive cash flows but bear default risk; and pay-through securities where the SPV commits to regular payments and absorbs default risk. While securitization provides benefits, its use in India has been limited due to higher costs compared to other sources of funding and lack of a

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    76 views3 pages

    Securitisaton

    Uploaded by

    Avishek Dey A Negative
    Securitization involves selling existing or future receivables to a special purpose vehicle (SPV) that pays for them by issuing securities to investors. The SPV converts illiquid assets like loans or receivables into liquid securities that can be traded. Securitization allows originators like banks to raise funds and rotate assets faster for higher profits, while providing investors with good quality debt instruments. There are two main types: pass-through securities, where investors receive cash flows but bear default risk; and pay-through securities where the SPV commits to regular payments and absorbs default risk. While securitization provides benefits, its use in India has been limited due to higher costs compared to other sources of funding and lack of a

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    of 3

    December 22, 2011

    [A Brief Detail About Securitisation]

    SECURITISATION
    Submitted by Avishek Kumar Roll No- P61026 CONCEPT
    SECURITISATION INVOLVES Selling existing receivables or future inflows To an intermediary ( or SPV ) for PRICE. SPV pays the price by Selling them to investors in smaller quantities In form of financial claims ( called securities) Through capital market . FEATURES Secn coverts illiquid assets into liquid ones. Securities : financial claims which can be traded in market

    SEBI: PUBLIC OFFER AND LISTING OF SECURITISED DEBT INSTRUMENTS REGULATIONS, 2008
    Securitisation means acquisition of debt or receivables by any special purpose distinct entity from any Originator / s for purpose of issuance of Securitised debt instruments to investors based on such debt or receivables and such issuance

    APPLICATION OF SECURITISATION
    1). EXISTING RECEIVABLES
    Mortgage Loans Equipment Lease / HP receivables Housing loan receivables Auto loans etc. Real estate Lease receivables

    2).FUTURE RECEIVABLES
    Generating Out of Contract Oil , Electricity , Gas revenues Not generating out of contract ( future projected flows) Future billings of Airlines Toll Receivables ,Ports, Airport operators Urban Infra: Water, sewerage charges etc.

    NICMAR, PGPPEM 6TH BATCH

    Page 1

    December 22, 2011

    [A Brief Detail About Securitisation]

    PROCESS
    1. SPV: Entity (trust) specially created for this purpose [US: specially created agencies Govt. National Mortgage Association (GNMA), Federal Mortgage Association (FNMA)] India: IDFC, ILF&S 2. Assets: should be homogeneous in nature; extent of security; maturity pattern (to make pooling convenient) 3. Other requisites: a) Documented history of delinquency b) Standardized contracts c) Diversified Portfolio d) Low Losses 4. Securities: Pass through or Pay through 5. Form of Securities: promissory notes, Commercial Paper, Bills, Bonds etc. 6. Investors: Banks, MFs, FIs, Govt., Pension Funds etc. 7. SEBI requirements : a) Merchant Bankers to manage issue; underwriting if necessary; obtain credit rating (minimum investment grade). b) Collection of receivables: Originator continues to collect receivables against small fees & pass on SPV. c) Trustee: To oversee process of secn and ensure compliance by originator & SPV. d) Escrow A/C : to be operated by trustee e) Credit enhancement : by originator (if required) Financial guarantees; over-collateralization; cash deposit; additional security; L/C from banks or Fin. Institutes. f) Liquidity support : by SPV (if required) To make good shortfall (if any) in recoveries from originator.

    BENEFITS
    To Originator Raise funds immediately (say in one or two years) after start of operation. Faster rotation / multiple asset creation >> higher profits Cheaper source May beat the rating of company ( bcoz rating checks reliability of flows of only the particular project and not credibility of company in general ) To Investors Good Quality Debt Process supervised by trustee No administration of receivables required Better returns To SPV Management fees

    NICMAR, PGPPEM 6TH BATCH

    Page 2

    December 22, 2011

    [A Brief Detail About Securitisation]

    TYPES
    1).PASS THROUGH SECURITIES
    1. Security Holder (Investor) entitled to proportionate share of periodic cash flow (Usually known as cash flow investor) 2. Originator mostly does not take risk of defaults by obligators. 3. Disadvantage: Default risk for Security holders (Investors)

    2).PAY THROUGH SECURITIES ALSO KNOWN AS [COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) ]


    1. 2. 3. 4. 5. Investors are DEBT Investors Receivables not sold, but only charged in favor of Trustee (on behalf of SPV). No prepayment risk / default risk for investor bcoz SPV commits regular payouts Securities trenches: 7 yrs, 10 yrs & 15 yrs. Interest paid to all trenches regularly, principle paid first to fastest trench & then to another trench. 6. SPVs can make temporary investments of excess cash 7. Rated high quality ( bcoz of SPV assurance) > Lower returns to investor

    SECURITIZATION IN INDIA
    Costlier than other cheaper sources available. Only highly rated papers are in demand but no market for modest rated papers Legal / tax regulations unclear. Secondary market is not so deep for debt instruments.

    SECURITIZATION STORIES (JULY 09 BUSINESS LINE)


    Vishnu Prayag 400 Hydro power project JP Power Ventures securitized future receivables amounting to Rs 1,750 cr. and paid off Rs 900 cr. in outstanding debt to banks. JP mainly supplies electricity to UP Power Corporation. Securitized paper was placed with few banks at competitive coupon rate. Time over which receivables have been securitized exceed maturity of the existing debt.

    NICMAR, PGPPEM 6TH BATCH

    Page 3

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