Securitization of debt

Intro
NBFC engaged in many business

All will be in credit payment

Their money is locked up for few months They make pool of receivables and sell it in the

market
Get them rated by agencies So that their value increases

securitization
Is a device of structured financing where

an entity

seeks to pool together its interest in identifiable future cash flows over time, transfer the same to the

investors
With or without collateral support Achieve the purpose of financing

 Obligors= entities who owe money to the NBFC Originators= entity that securitizes its assets Spv= is an intermediary between investors and

originators
Investors- entities or people who buy securitized

asset

Process
Credit rating agency

rating
TRUE SELL Merchant banker

SPV
Bankruptcy remote trfr cash EMI

Investor hunt

investor

PASS THRU AND PAY THRU

OBLIGORS

 Cr rating agency and merchant banker are the 2

ppl who assist in selling instruments

stages
Asset identification: originator identifies the asset or

a pool of assets that have to be securitized

Structuring the securities

creates a spv and sells different assets for the same

spv is a legal entity . They structure these securities

on the preference of investors and originators

To attract investors they provide insurance or third party assurance Securities traded in secondary market This negotiable instrument are also listed
Following activities are included in this stage: Credit enhancement Independent credit rating &documentation
Investor servicing

periodic payment Terms made by investor interest is paid and also principal

Assets for securitization

Well diversified Statistical history Homogeneous nature Some extent liquid

Various assets
Real estate loans: residential mortgages, long

maturity period, highly illiquid

Auto loans. Equipment lease, hire purchase- 3-7

yrs, backed by hypothecation of the vehicle

Bank loans- collateralized debt obligation Credit cards receivables NPA

Parties involved
Originator- create assets Servicers- collecting principal payment and interest,

prepare a detail report Merchant bankers- structure the transactions, underwriting the securities Spv- intermediary, pooling, holding, issuer Credit enhancers- vehicle that reduce the overall credit risk of a security issue. Purpose is to improve rating. Rating agencies Trustees- asset backed security is the intermediary between the servicer and investment between cr enhancer and the investor

Pass through

Pay through

Direct claim of the investors Reconfigures the cash on all that spv collects from flows by reinvesting it.spv the receivables trfrd to it claim on collection and investor on collection Payment date to investor Investors are paid on the match with the receipt date fixed date and not on from the obligor matching date Payment as per obligors Payment structured as per payment dd of investors All those obligors payment Different payment dates whole dates and int rate and rates can be pooled matches are pooled together if structured by an together spv

Partial guarantee structures

Pay thru or pass thru with partial guarantee of the

originator in case of default.

Enhances credit quality and rating Financial institutions and other companies prefer full

guarantee
These are usually listed in the exchange

There are many people who are not aware of such

instruments

Benefits of securitization
Originator

Liquidity Reduced cost of capital Profitability

Risk transfer partly risk transferred to investor

High capital t/o

To Investors
New avenue for investment Diversified risk Better rate of return

Benefits to economy
Growth in transactions Promote savings Promote socialism- Mahatma Gandhis idea of

capitalist being a trustee of resources and not the owner

In securitization ownership is with many investors

-society earn

Key factor for success of securitization

Special purpose vehicle-mandatory requirement, does

not protect the interest of investor

Marketability- should be marketable Wide

distribution- most transaction

are

private

placements by merchant bankers, public domain etc

Demerits of securitization for economy

Less importance to banks- intermediation will be less if

its is known to investors

NPAs- US subprime crisis

Securitization markets
Origin in USA

1970
MORTGAGE ASSET BACKED SECURITY-85 SECURITIZATION IN INDIA 90s Recourse Corporate loan securitization CRISIL rated first securitization programme-91-92

 1996- volume started growing India is 2nd There were direct assignment deal where we din have

spv
Also third part guarantee

Types of asset securitized in India

Existing assets Future cash flows Rated securitization backed by existing securities Future flow backed by securitization

Regulatory scenario in India

Securitization and reconstruction of financial assets

and enforcement of security interest act,2002 is an important regulation applicable to securitization in India
Amendment bill-2005
Legal framework The bill is referred to standing committee on finance

This bill helps in listing securities in the stock

exchange

Hurdles to securitization in India

Stamp duty Major hurdle, rates go up 10%
Taxation -

investor are taxed and not the spvs

Accounting rules- institute of chartered accountants of

India has issued a guidance note on accounting securitization Off balance sheet treatment is allowed If risk and rewards are transferred ,that assets transferred to spvs should stay on the balance sheet of the spv in all cases

Future prospects in India

Successful attempt by companies

Receivables credit cards, loans

Scope of improving: Improvement in legal frame work Stamp duty Development of institutional backup

History of Rating
Standard and Poors
Henry Varnum Poor was a leader in establishing the financial information industry on

the principle of the investor right to know.

In 1941 Standard statistics and Poors publishing company merged together to form

S&P
They provide credit ratings, indices, risk evaluation, investment research and data.

History of Rating
Moodys
It published Moodys manual of industrial and miscellaneous securities in the first

year. It provided information and statistics on stocks and bonds of financial institutions, government agencies, manufacturing, mining, utilities and food companies. In 1907, due to stock market crash, the co. was closed and again came back in 1909 in which he offered to investors an analysis of security values

Other world wide agencies

A.M.Best (US) which specializes in Insurance company ratings

Dominion Bond Rating service (Canada / US) is based at Toronto, canada.

Fitch Ratings Ltd. Is an international CRA. Headquartered at New york city and

London Baycorp Advantage (Australia and New zealand) Dun & Bradstreet (US) called as D-U-N-S (Universal Numbering System)

Credit Rating in India

CRISIL 1987 Promoted by ICICI, UTI,LIC,GIC,SBI S&P is the largest SH. It is Indias leading ratings, financial news, risk and policy advisory company. Ratings are for short, medium and long term debt instruments issued by

manufacturing co., NBFCs, municipal bodies, state governments, real estate and health care institutions. It rates debentures, preference shares and fixed deposits

Credit Rating in India

ICRA - 1991

Promoted by IFCI, SBI, LIC, PNB, CBI, Allahabad Bank.

Moody is the largest SH. It undertakes credit ratings, equity grading for industrial sectors both in India and

abroad and offers ratings, Information and advisory services. Ratings are for short, medium and long term debt instruments issued by corporate, ULB. It rates Bonds and Non convertible debentures

Credit Rating in India

CARE APRIL 1993 Promoted by IDBI, Canara Bank, UTI It undertakes credit ratings, Information and Advisory services. It is retained by GOI for

assistance in equity valuation for suggesting divestment strategies. Ratings include public utilities, financial institutions, infrastructure projects, SG and municipal bodies. It rates all types of debt instruments like commercial paper, fixed deposits, bonds, debentures and preference shares.

Credit Rating in India

FITCH 2000

Fitch India is a 100% subsidiary of the Fitch group

Fitch rates entities in 75 countries and has 1100 employees in more than 40 local

offices world wide * It rates for financial institutions, Insurance, corporate, structured finance and public finance markets Ratings are for short, long term credit and term deposits

Credit Rating in India

SMERA - 2005

Promoted by SIDBI, D&B, CIBIL

It is the only agency dedicated to small and medium enterprises It considers financial condition and several qualitative factors to assess the credit

worthiness of the SMEs Rating has 2 parts size indicator (net worth) and composite appraisal / condition indicator

Credit Rating in India

BRICKWORK - 2008

Promoted by Bangalore based individual with the aim to provide unbiased

information to Indian Investor Ratings are for short, medium and long term debt instruments , mutual fund schemes and IPO BRICKWORK ratings are acceptable to banks in India for their loan assessment process as per RBI circular

Benefits of Credit Rating

For INVESTORS:
Independent and professional judgment of the credit quality of the instrument. Low cost supplement to the in-house appraisal system of organized institutional

investors It can be used by the investor to optimize risk return preference For ISSUERS: There is a faith placed by the market on opinions of rating agencies. It is benchmark for issue pricing and result in savings in costs.

Limitations of Credit Rating

They are not recommendations to invest.

Ratings tend to be sticky. They can be changed only periodically

It is based on some events, news or happenings and following extrapolated

projections It is a human perception It lead to financial crisis, financial instability and cross country contagion