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    Introduction To Risk Management and MCQ L 1

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    Ayaz Meer
    Securitization is the process of pooling loans and other assets and converting them into marketable securities. It allows risk to be distributed to various investors. In securitization, assets are transferred to a special purpose vehicle (SPV) which issues securities backed by the assets. This improves liquidity and capital position for originators. It benefits investors by providing opportunities to invest in high-quality assets and diversify risk.

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    Introduction To Risk Management and MCQ L 1

    Uploaded by

    Ayaz Meer
    508 views15 pages
    Securitization is the process of pooling loans and other assets and converting them into marketable securities. It allows risk to be distributed to various investors. In securitization, assets are transferred to a special purpose vehicle (SPV) which issues securities backed by the assets. This improves liquidity and capital position for originators. It benefits investors by providing opportunities to invest in high-quality assets and diversify risk.

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    Presentation on Securtization

    Original Title

    Introduction to Risk Management and MCQ L 1[1]

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    Securitization is the process of pooling loans and other assets and converting them into marketable securities. It allows risk to be distributed to various investors. In securitization, assets are transferred to a special purpose vehicle (SPV) which issues securities backed by the assets. This improves liquidity and capital position for originators. It benefits investors by providing opportunities to invest in high-quality assets and diversify risk.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    508 views15 pages

    Introduction To Risk Management and MCQ L 1

    Uploaded by

    Ayaz Meer
    Securitization is the process of pooling loans and other assets and converting them into marketable securities. It allows risk to be distributed to various investors. In securitization, assets are transferred to a special purpose vehicle (SPV) which issues securities backed by the assets. This improves liquidity and capital position for originators. It benefits investors by providing opportunities to invest in high-quality assets and diversify risk.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    of 15

    SECURITIZATION

    Developed by Dr IKRAM CPA, PhD.


    SECURITIZATION
    • It stands for conversion of loans or loan
    recoveries into marketable paper or securities by
    SPV (Special Purpose Vehicle)
    • By pooling assets, it diversifies and reduces risks
    of the portfolio and, with additional credit
    enhancement arrangement, can produce highly
    creditworthy instruments to market.
    • Isolating and efficiently allocating the risk.
    • It is selling the rights to cash flow from loans etc .
    Developed by Dr IKRAM CPA, PhD. 2
    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
    Developed by Dr IKRAM CPA, PhD. 3
    STRUCTURE OF SECURITIZATION

    Developed by Dr IKRAM CPA, PhD. 4


    PLAYERS INVOLVED IN
    SECURITIZATION
    1. 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.
    4. Credit Rating Agency: To provide value addition to security
    5. Insurance Company / Underwriters: To provide cover
    against redemption risk to investor and / or under-
    subscription
    6. Obligors: Company that gives debt to other company as a
    result of borrowing.( debtor)
    7. Investor: The party to whom securities are sold .
    Developed by Dr IKRAM CPA, PhD. 5
    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

    Developed by Dr IKRAM CPA, PhD. 6


    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

    Developed by Dr IKRAM CPA, PhD. 7


    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.

    Developed by Dr IKRAM CPA, PhD. 8


    CATEGORY OF SECURITIZATION
    • Assets backed securities :Those securities whose
    income is derived from pool of underlying assets.
    Example: payments from car loan, credit card.
    • Mortgage backed securities: Mortgage loans are
    purchased from banks and assembled into pools
    which become securities.

    • Credit debt obligation:


    CBO: Those backed b corporate bonds.
    CLO: Those backed by leveraged home loans.

    Developed by Dr IKRAM CPA, PhD. 9


    EXAMPLE OF SECURITIZATION IN INDIA
    • First securitization deal in India between Citibank and GIC
    Mutual Fund in 1991 for Rs 160 million.
    • L&T raised Rs 4,090 mln through the securitization of future
    lease rentals to raise capital for its power plant in 1999.
    • Securitization of aircraft receivables by Jet Airways for Rs
    16,000 mn in 2001 through offshore SPV.
    • India’s largest securitization deal by ICICI bank of Rs 19,299
    mn in 2007. The underlying asset pool was auto loan
    receivables

    Developed by Dr IKRAM CPA, PhD. 10


    WHAT CAN BE SECURITIZED
    All sorts of assets are securitized:
    • Auto loans
    • Student loans
    • Mortgages
    • Credit card receivables
    • Lease payments
    • Accounts receivable.

    Developed by Dr IKRAM CPA, PhD. 11


    BENEFITS TO FINANCIAL
    ENVIRONMENT
    • This bring the financial market and capital market together
    and hence increase the power of capital market.
    • The securitization reduces the risk for the creditor so it will
    lead the lower cost of funding.
    • Agency and intermediation cost is reduced.
    • The rate of assets turnover in market increases. HFCs do
    securitize due to this the volume of the resources increases.
    • Component risk (credit ,liquidity, catastrophe) are segregated
    and distributed to the market intermediaries which absorb
    them and make market stable.

    Developed by Dr IKRAM CPA, PhD. 12


    The Subprime Mortgage Securitization Process
    Warehouse
    Lender Credit
    (makes short term loans to Rating
    Issuer for purchase of
    mortgages) Agency

    Requests loan

    Mortgagor Bank/Financial Arranger/


    Provides
    Institution Loan sold
    (Borrower) loan
    Issuer
    Loans pooled
    (Originator) and sold to Trust

    Makes loan
    payments
    Provides customer service SPV
    to borrower
    (Trust)
    Servicer
    (is employed by Trust to issues
    collect loan payments etc.) Remits loan payments to Trust and securities
    advances unpaid interest payments.

    Investors

    Adapted from: “Understanding the Securitization of Subprime Mortgage Credit’” Ashcraft and Schuermann, Federal Reserve Bank of
    13
    New York Staff Report 318, March 2008. Developed by Dr IKRAM CPA, PhD.
    Developed by Dr IKRAM CPA, PhD. 14
    Developed by Dr IKRAM CPA, PhD. 15

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