6923052-Securitization-ppt

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Asset Securitization

Securitization:

Securitization Securitization is “the issuance of marketable securities backed by the expected cash flows from specific assets (receivables)”

Parties to an issue:

Parties to an issue Originator The initial owner of the loans. Sells them to the SPV Obligors The loan customers. Pay cashflows that are securitised SPV Special purpose Vehicle Set up specifically for transaction. Purchases assets from Originator. Company/Trust/ Mutual Fund Investors Subscribe to securities issued by SPV

Parties to an issue (contd.):

Parties to an issue (contd.) Collection Agent Collects money from Obligors, monitors and maintains assets. Usually the originator Credit Enhancement Provider Provides credit enhancement by way of swaps, hedges, guarantees, insurance etc. Merchant Banker As structurer for designing & executing the transaction and as arranger for the securities Credit Rating Agency Provides a rating for the deal based on structure, rating of parties & portfolio, legal and tax opinion etc

Generic deal diagram:

Generic deal diagram SPV Investors Originator Obligors Credit Enhancement Providers Rating Agency Structurer 9 Issue of securities Collections Credit enhancement Rating 8 Subscription to securities Cash flows 10 11 Servicing of securities Contracts Ongoing cash flows Initial cash flows Collection Agent Original Loan Sale of asset Purchase consideration Arranger 1 2 3 4 5 6 7

Why securitize assets? :

Why securitize assets? More efficient financing Improved balance sheet structure Better risk management

What type of assets can be securitized?:

What type of assets can be securitized? Any type of asset with a reasonably predictable stream of future cash flows can be securitized. Assets that are easiest to securitize are those: that occur in large pools; for which past experience can be used to predict default rates; for which documentation is standardized; and for which ownership is transferable.

Types of Securitization:

Types of Securitization MBS (Mortgage based securitization ) ABS (Asset based securitization)

Benefits to Originator:

Benefits to Originator Off balance sheet financing Regulatory capital relief Improvement of RoCE Multiple alternative sources of funding Conversion of illiquid assets into liquid securities Systemically solves ALM problems in the sector - mismatch due to difference in tenor and characteristics of assets (mostly fixed rate and up to 30 years) and liabilities

Benefits to Investor:

Benefits to Investor Enjoys low cost operations and servicing due to economies of scale of the originator Credit risk is minimized Exposure on rated, low-risk housing loans Expertise of originators helps maintain quality of underlying assets Credit enhancement possible

Benefits to Financial System:

Benefits to Financial System Cleaner books due to expertise of originators Systemically solves the ALM problems in the sector Encourages an efficient market Results in substantial benefits to the end customer of home loans

What is required for a successful asset securitization?:

What is required for a successful asset securitization? Robust financial infrastructure The Legal Environment The Accounting Environment The Regulatory Environment The Taxation Environment Back-office Systems

Drivers of Strong Investor Demand:

Drivers of Strong Investor Demand Receivables are sufficient to meet the payments promised by the SPV Safeguards exist to provide for shortfalls in cash from receivables Investors have clear legal claims on the income from receivables and have adequate protection in the case of delinquency.

Strong Investor Demand contd…:

Strong Investor Demand contd… Credit Enhancement Third Party Guarantees Subordinated debt Over-Collateralization Cash Collateral Accounts

SECURITISATION -INDIAN CONTEXT:

SECURITISATION -INDIAN CONTEXT First deal in India between Citibank and GIC Mutual Fund, in 1990 for Rs. 160 million. Securitisation of cash flow of high value customers of Rajasthan State Industrial and Development Corporation in 1994-95, structured by SBI cap. Securitisation of overdue payments of UP government to HUDCO by issue of tax-free bonds worth Rs. 500 million Securitisation of Sales Tax deferrals by Government Of Maharashtra in August 2001 for Rs. 1500 million with a green shoe option of Rs. 75 million. First deal in power sector by Karnataka Electricity Board for receivables worth Rs. 1940 million and placed them with HUDCO. Mega securitisation deal of Jet Airways for Rs. 16000 million through offshore SPVs. Data indicate that ICICI had securitised assets to the tune of Rs. 27500 million in its books at end March 1999.

PowerPoint Presentation:

Some of the companies that have been Involved in this are Ashok Leyland finance Cholamandalam investment & finance Esanda finance Sakthi finance Tata finance SRF finance

MBS - A Win-Win for All:

MBS - A Win-Win for All Originators Churn higher returns on lower capital base Investors Can invest in low-risk rated home loans paper without hassles of origination/ servicing Financial system as a whole Expertise of Specialists helps maintain quality of underlying assets and reduces ALM mismatches Home Loan Customers Access to cheaper funds

Committee involved in Securitization:

Committee involved in Securitization Narasimham committee I & II Andhyarujina committee Recommendations made by them Empower banks & FI’s to take the possession of the assets & to sell them wihout the intervention of the court, was enacted.

When the bill was passed?:

When the bill was passed? The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance, 2002. on 21.06.2002. It received the assent of the President on 17.12.2002 and has now become an Act.

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Thank you………

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