Module Number: 11
Agenda
Background Fundamentals of Securitisation Parties to a securitisation transaction Risk Analysis Structuring Credit Enhancement SPV Structuring Use of securitisation in project finance
What is securitization
Asset securitization transforms the risk-return characteristics of an asset to meet demands of the participants in the transaction
Securitization is a process of pooling / repackaging non-marketable, illiquid assets into tradable securities Involves true sale of the underlying assets Credit support provided by the originator/ issuer to enhance rating of the securitized paper Other kinds of credit enhancement is also used to obtain better rating
Servicer
Sale of asset
SPV
Rating
Servicing of securities
Investors
Originator
Subscription to securities
Arranger
Contracts Ongoing cash flows Initial cash flows
Structurer
Parties to a securitisation
Originator
Initial owner of the assets Sells its asset to the SPV
Obligor
Contractual debtor to Originator Pays cashflows that are securitised Set up specifically for transaction Purchases assets from Originator Company/Trust/ Mutual Fund Subscribe to securities issued by SPV
SPV
Investors
Parties to a securitisation(contd.)
Credit Rating Agency Legal & Tax Counsel
Provides a rating for the deal based on structure, rating of parties, legal and tax opinion etc Provide key opinions on the structure & underlying contracts Appointed for conducting due diligence both initial and during tenor of deal Appointed for safe custody of the underlying documents and registration/ transfer of securities
Risk analysis
Risk
Credit risk and bankruptcy risk
Desc r ipt io n
Ability of the entity to pay its obligations and survive as a viable entity Performance risk Ability to fulfill contractual obligations Asset/ collateral Variation in the value of the risk underlying asset Payment / Ability of other parties, particularly counter party credit enhancement providers, to risk meet their obligations
D escr ipt io n
Variation in interest rates Variation in exchange rates
Ability to liquidate the underlying assets or collateral to service the Investors in a timely manner Co-mingling risk Risk of loss of moneys collected and retained by the servicer for a short period before remitting to the SPV
Over-collateralisation
Originator sets aside assets/cashflows in excess of the collateral required to be assigned to the SPV Additional comfort if part of the cashflows or assets or Obligors become impaired
Spread account
Difference between the yield on underlying assets and yield to the investors (excess spread) A spread account traps the excess spread (net of all running costs) Amount returned to the Originator after the payment of principal and interest to the investors.
SPV structuring
Characteristics of the SPV
Bankruptcy remoteness Formed for specified purpose; no other activities undertaken Does not add to the costs to the transaction - Capital efficient and tax efficient
Legal structure dependent on the regulatory and legal environment of its domicile
India - company / trust / mutual fund
SPV structuring
Alternative Payment structures
Pass Through structure - SPV remits any funds collected completely and immediately to the investors. Pay Through structures
De-synchronization of servicing of the securities from the underlying cash flows. SPV has discretion to re-invest the funds and pay investors according to a pre-determined schedule.
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