Securitization Flashcards
Assets/debt securitization
Transfer of illiquid asset into security which may be traded laterin the open market
Features of Securitization
BTS has HTC
a. Creation of Financial Instruments
b. Bundling and Unbundling
c. Tool of Risk Management
d. Structured Finance
e. Tranching
f. Homogeneity
Benefits of Securitization From the angle of originator
Helps OMR
a. Off – Balance Sheet Financing
b. More specialization in main business
c. Helps to improve financial ratios
d. Reduced borrowing Cost
Benefits of Securitization
.From the angle of investor
PR team for Diversification of risk
a. Diversification of Risk
b. Regulatory requirement
c. Protection against default
Participants in Securitization
1) Primary Participants
Primary Participants are main parties to this process. Primary participants in the process of securitization are as follows:
a. Originator: It is the initiator of deal or can be termed as securitizer. It is an entity which sells the assets lying in its books to SPV and receives the funds.
b. Special Purpose Vehicle (SPV): It is created for executing the deal. It holds the legal title of assets transferred to it by originator.
c. Investors: Investors are buyers of securitized papers which may be individual, institutional investor such as mutual funds, provident funds, insurance companies etc.
Secondary Participants
a. Obligors
b. Rating Agency
c. Receiving and Paying agent (RPA) or Servicer or Administrator
d. Agent or Trustee
e. Credit Enhancer
f. Structurer
Pricing of securitization instrument
From originator angel
Instrument can be priced at a rate at which originator has incur an outflow
Form investor
Future cash flow discounted using required yeild of maturity
Problems in Securitization
a. Stamp Duty
b. Taxation
c. Accounting
d. Lack of standardization
e. Inadequate Debt Market
f. Ineffective Foreclosure laws
Various securitization instruments
Pass through credit
Pay through security
Stripped security
