`

Securitization of debt
Meaning Features

` `

Special Purpose Vehicle Pass Through Certificate & Mechanism

It refers to the process of liquidating the illiquid and long term assets like loans or receivables of financial institutions like banks by issuing marketable securities against them. It is the process of separating certain assets from the balance sheet and using them as collateral for the issuance of securities.

` ` ` ` ` ` `

Marketability Merchantable Quality Wide Distribution Homogeneity Commoditization Integration and Differentiation De-construction

` ` ` ` `

Identification Stage Transfer Stage Issue Stage Redemption Stage Credit Rating Stage

Helps recycle funds at reasonable cost and with less credit risk. Provides scope for risk diversification.

and interest payment

GUARANTOR / TRUST

Primary Remits principal Borrowers Loan Originator

Purchase credit enhancement

Forward principal and interest payment Initial cash proceed from securities

SP V

Passes through principal and interest payments

Investors
Initial cash purchase of securities Distribute securities

Transfer asset pool

Credit Enhancer

Merchant Bankers or Underwriters

Initial cash proceeds from Securities Issues Securities

Provide credit enhancement for the asset pool

SP V

Intermediate entity between the originator of the receivable and the end investor. This is an institution or trust which is ready to help the institution going for securitization by converting the pool of assets into securities. Originator transfers the assets to the SPV, which holds the assets on behalf of the investors and issues its own securities to investors.

Certificates issued by the SPVs, which represents a direct claim of the investors on all that the SPV collects from the receivables transferred to it. They imply certificates of proportional beneficial interest in the assets held by the SPV. If the SPV is re-configuring the cash flows by reinvesting it, in order to pay the investors on fixed dates, other than one on which transferred receivables are collected by SPV, its called Pay Through Certificates.