December 22, 2011

[A Brief Detail About Securitisation]

SECURITISATION
Submitted by Avishek Kumar Roll No- P61026 CONCEPT
SECURITISATION INVOLVES Selling existing receivables or future inflows To an intermediary ( or SPV ) for PRICE. SPV pays the price by Selling them to investors in smaller quantities In form of financial claims ( called securities) Through capital market . FEATURES Secn coverts illiquid assets into liquid ones. Securities : financial claims which can be traded in market

SEBI: PUBLIC OFFER AND LISTING OF SECURITISED DEBT INSTRUMENTS REGULATIONS, 2008
Securitisation means acquisition of debt or receivables by any special purpose distinct entity from any Originator / s for purpose of issuance of Securitised debt instruments to investors based on such debt or receivables and such issuance

APPLICATION OF SECURITISATION
1). EXISTING RECEIVABLES
Mortgage Loans Equipment Lease / HP receivables Housing loan receivables Auto loans etc. Real estate Lease receivables

2).FUTURE RECEIVABLES
Generating Out of Contract Oil , Electricity , Gas revenues Not generating out of contract ( future projected flows) Future billings of Airlines Toll Receivables ,Ports, Airport operators Urban Infra: Water, sewerage charges etc.

NICMAR, PGPPEM 6TH BATCH

Page 1

December 22, 2011

[A Brief Detail About Securitisation]

PROCESS
1. SPV: Entity (trust) specially created for this purpose [US: specially created agencies Govt. National Mortgage Association (GNMA), Federal Mortgage Association (FNMA)] India: IDFC, ILF&S 2. Assets: should be homogeneous in nature; extent of security; maturity pattern (to make pooling convenient) 3. Other requisites: a) Documented history of delinquency b) Standardized contracts c) Diversified Portfolio d) Low Losses 4. Securities: Pass through or Pay through 5. Form of Securities: promissory notes, Commercial Paper, Bills, Bonds etc. 6. Investors: Banks, MFs, FIs, Govt., Pension Funds etc. 7. SEBI requirements : a) Merchant Bankers to manage issue; underwriting if necessary; obtain credit rating (minimum investment grade). b) Collection of receivables: Originator continues to collect receivables against small fees & pass on SPV. c) Trustee: To oversee process of secn and ensure compliance by originator & SPV. d) Escrow A/C : to be operated by trustee e) Credit enhancement : by originator (if required) Financial guarantees; over-collateralization; cash deposit; additional security; L/C from banks or Fin. Institutes. f) Liquidity support : by SPV (if required) To make good shortfall (if any) in recoveries from originator.

BENEFITS
To Originator Raise funds immediately (say in one or two years) after start of operation. Faster rotation / multiple asset creation >> higher profits Cheaper source May beat the rating of company ( bcoz rating checks reliability of flows of only the particular project and not credibility of company in general ) To Investors Good Quality Debt Process supervised by trustee No administration of receivables required Better returns To SPV Management fees

NICMAR, PGPPEM 6TH BATCH

Page 2

December 22, 2011

[A Brief Detail About Securitisation]

TYPES
1).PASS THROUGH SECURITIES
1. Security Holder (Investor) entitled to proportionate share of periodic cash flow (Usually known as cash flow investor) 2. Originator mostly does not take risk of defaults by obligators. 3. Disadvantage: Default risk for Security holders (Investors)

2).PAY THROUGH SECURITIES ALSO KNOWN AS [COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) ]

1. 2. 3. 4. 5. Investors are DEBT Investors Receivables not sold, but only charged in favor of Trustee (on behalf of SPV). No prepayment risk / default risk for investor bcoz SPV commits regular payouts Securities trenches: 7 yrs, 10 yrs & 15 yrs. Interest paid to all trenches regularly, principle paid first to fastest trench & then to another trench. 6. SPVs can make temporary investments of excess cash 7. Rated high quality ( bcoz of SPV assurance) > Lower returns to investor

SECURITIZATION IN INDIA
Costlier than other cheaper sources available. Only highly rated papers are in demand but no market for modest rated papers Legal / tax regulations unclear. Secondary market is not so deep for debt instruments.

SECURITIZATION STORIES (JULY 09 BUSINESS LINE)

Vishnu Prayag 400 Hydro power project JP Power Ventures securitized future receivables amounting to Rs 1,750 cr. and paid off Rs 900 cr. in outstanding debt to banks. JP mainly supplies electricity to UP Power Corporation. Securitized paper was placed with few banks at competitive coupon rate. Time over which receivables have been securitized exceed maturity of the existing debt.

NICMAR, PGPPEM 6TH BATCH

Page 3