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SECURITIZATION
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It stands for conversion of loans or loanrecoveries into marketable paper or securitiesby SPV.
By pooling assets, it diversifies and reducesrisks of the portfolio and, with additional creditenhancement arrangement, can produce highlycreditworthy instruments to market.
Isolating and efficiently allocating the risk.
It is selling the rights to cash flow from loansetc .
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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
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Investors receive income and return of capitalfrom the assets over the life time of the securities
The risk on the securities owned by investors is
minimized as the securities are collateralized byassets
The difference between the rate of the borrowersand 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
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STRUCTURE OF SECURITIZATION
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1 Originator: An entity making loans to borrowers orhaving receivables from customers
2 Special Purpose Vehicle: The entity which buys assets
from Originator and packages them into security forfurther sale
3 Investment Bank : A body that is responsible forconducting the documentation work.
4 Credit Rating Agency:
To provide value addition to security.
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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 .
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It is a legal entity created to fulfill the narrow,specific or temporary objectives. ie funding theassets.
SPV are typically used by companies to isolatethe firm from financial risk and allow otherinvestors to share the risk.
Intermediary Helps in the pooling process
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ADVANTAGE Opportunity to potentially earn a higher rate
of return .
Opportunity to invest in a specific pool of highquality credit-enhanced assets .
Portfolio diversification .
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Assets backed securities :Those securitieswhose income is derived from pool ofunderlying assets.
Example: payments from car loan, credit card.
Mortgage backed securities:Mortgage loansare purchased from banks and assembled into
pools which become securities.
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First securitization deal in India between Citibank andGIC 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 plantin 1999.
Securitization of aircraft receivables by Jet Airways forRs 16,000 mn in 2001 through offshore SPV.
Indias largest securitization deal by ICICI bank of Rs19,299 mn in 2007. The underlying asset pool was autoloan receivables
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All sorts of assets are securitized:
Auto loans.
i) Prime auto ABS.
ii) Non-prime ABS.
iii) Sub- prime ABS
Credit card receivables
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Mortgagor(Borrower)
Bank/FinancialInstitution
(Originator)
Requestsloan
Provides
loan
Arranger/Issuer
Loan sold
Investors
issuessecurities
Credit
RatingAgency
SPV(Trust)
Loans pooledand sold toTrust
Servicer(is employed by Trust tocollect loan paymentsetc.)
Makes loanpayments
Remits loan payments to Trust andadvances unpaid interest payments.
Provides customerservice to borrower
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