securitization in india

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Securitization in India. Group Members S. Venkatakrishnan 82038 Neeraj Srivastava 82025 Sharad Sachan 82042 Subhash Sen 82043 Vivek Kumar - 82045. Conventional bond structure. Structure of a normal debt instrument. Bonds. Earnings Power etc. Issuer. Investor. - PowerPoint PPT Presentation



  • CONVENTIONAL BOND STRUCTUREStructure of a normal debt instrumentA debt instrument is the obligation of the issuerNormally, the credit profile of the issuer depends on the aggregated earnings power of its businesses in the context of its financial risk profile and management capabilityIt is these businesses that would need to generate the cash flows for bond redemption

    Earnings Power etcIssuerInvestorBondsCash

  • LIMITATIONS OF CONVENTIONAL DEBT FUNDINGLimited flexibility to enhance the credit quality of the borrowerLargely standardized loan products homogenizing credit quality across cross-section of asset side inflows and liability side outflowsFirms unable to package out different levels of risk to meet varying needs of investorsConsequently, cost of funds linked to average credit profile of different cash flows

    Are alternatives available?

  • WHAT ARE THE ALTERNATIVESThird party credit supportFull financial guarantee/ Bond InsuranceLetter of CreditPartial Financial Guarantee

    Escrowing of cash flows

    Pledging/Assignment of future flowsSecuritizationPledging/sale of a pool of retail receivables into a SPVPledging/sale of liquid assetsPledging/sale of receivables from highly rated regular customers into a SPV


    Any support provided to conventional bond structure such thatThe debt instrument can achieve a rating higher than that implied by the aggregate earnings power of the issuer who deploys the cash proceeds of the bonds in its businesses

    Earnings Power etcIssuerInvestorBondsCashCredit Support


    Full financial guarantee, letter of credit, bond insuranceInstruments rating is equated to the credit rating of the facility providerFull credit support yet to commence as a commercial activity in India. Instances of full credit support usually a consequence of past relationshipsInternational full credit support suppliersLetters of credit- Commercial BanksBond insurance/ financial guarantees- monoline insurersPartial GuaranteeBond rating lies between the rating of the guarantor and the issuerInitially provided by multilateral entities like IFC Washington, FMO


    Non GuaranteedGuaranteed


    10 equal annual installments with the last 6 installments fully guaranteed by a AAA entityRating of obligorBBB +Weighted average Tenor5 years% Guarantee75%BBB + Pricing433 bps over G-secAA Pricing114 bps over G-secGuarantee Cost150 bps ( approx)


    ApplicationsWeak entities that are a part of a stronger business groups- guaranteed issuance, especially CPEntities with appetite for long tenor projects, where investor comfort is restricted to short tenor lendingEntities that enjoy long-term standing relationships with banks- letter of credit backed issuanceEntities that fit into the framework of multilateral agencies like IFC can approach them for partial guarantee

  • ESCROWING OF CASH FLOWSEscrow mechanism captures future sales to Highly rated customers, orA Pool of large numbers of customers

    Applicable to corporate issuers whenEscrowed revenues are exclusively made available for debt servicingAll operating expenses can be met out of remaining revenue sources

    Can achieve a rating enhancement of upto 2 notches due to prioritization achieved without impacting operations


    Rating of companyA+Credit enhancementEscrowing of cash flowsRating of structureAAPricing differential between A+ and AA130 bps over comparable G-Sec

  • ESCROWING OF CASH FLOWSApplied several times for entities that are unlikely to go bankrupt like municipalities, governments and statutory bodies, for eg.Escrow of energy sales by SEBs, property or other taxed by MunicipalitiesIn addition, BPO, rent receivables have also been escrowed ApplicationsEntities with a high asset turnover ratio where escrowing a small portion pf revenues could benefit a significant portion of the funding mixEntities having a regular inflow of stable non-operating cash flows like rentals

  • ASSIGNMENT OF FUTURE FLOWSFuture sales of goods with a ready market and relative price stability are assigned to an SPV. These are usually commodities or utilities

    Key risks: Price risk and generations risk

    Generation Risk of the said good/service is linked to the likelihood of continuance in operations of the facility operated can be mitigated by standby operator

    Earnings Power etcUserInvestorBondsCashSPEReceivablesCashGenerated and assigned over a period. Cash paid upfrontResponsibility for operating facility to generate receivablesStandby Operator

  • ASSIGNMENT OF FUTURE FLOWSApplicationsEntities with take or pay contract with a highly rated customer for any good or serviceEntities producing a highly marketable commodity like oil, gas etc.

  • SECURITIZATION - BASICSSecuritization is the pooling of homogeneous, financial"," cash flow producing, illiquid assets and issuing claims on those assets in the form of marketable / tradable securitiesTypically, a lender / originator advances a loan to borrower and over a period of time, he expects to receive repayment of principal and interest. In securitization, the lender / originator sells the right to receive the future receivables to a third party and receives the present value of the receivables at the initiation of the transactionThe higher yield associated with these securities attracts investors who are willing to bear the associated credit, prepayment and liquidity risk

  • SECURITIZATION - BASICSThe basic principles of direct assignment remain the same - the only difference being that the investor records the transaction as loans in its books and doesnt invest in a tradable securityThe originator also provides an upfront credit enhancement in the transaction to cover for the shortfalls in the pool because of borrower defaults; The primary advantage of securitization is the flexibility provided in terms of unbundling of risks and allocation of the same to various parties who are able to manage those risks

  • SECURITIZATION - BASICSSecuritization involves sale, transfer, pledge of specified assets to a Bankruptcy-remote Special Purpose Vehicle (SPV)The SPV in turn issues Notes (Pass Through Certificates) to investors in order to fund the purchase of the assetsInvestors (banks, insurance companies, and specialised funds) rely on the cash flows (principal, interest and sale proceeds when sold after foreclosure) generated by the underlying assets to pay interest and principal on the notesThe risk associated with the assets is stratified by looking at historical default and loss informationGenerally, the Originator remains the Servicer of the pool of the assets it had sold to the SPV

  • Key Features of SecuritizationAll the risks and rewards associated with underlying pool are transferred to the buyerThe transaction structure should be such that the bankruptcy of the seller does not affect the underlying poolThere is no recourse to seller once the underlying pool is sold

  • Key Features of SecuritizationPass Through Refers to securitization structure where the SPV makes payments, or rather, passes payments to the investors, on the same periods, and subject to the same fluctuations, as are there in the actual receivables viz. amount collected every month is passed through to investors, after deducting fees and expenses.Pay Through Where the payment to the investors are routed through SPV who does not strictly pay the investors only when the receivables are collected by it, but keeps paying on the stipulated dates irrespective of the collection dates. In order to allow for smoothed payment to investors by removing the fluctuations in its collections, the SPV uses a guaranteed investment contract or credit enhancements or both.Credit enhancements Refers to one or more initiatives taken by the originator in a securitization structure to enhance the security, credit or the rating of the securitised instrument.Loan to value ratio In case of asset based lending, means the amount of loan as a percent of the value of the asset on which the loan is secured.

  • SECURITIZATION VS. TRADITIONAL DEBT SecuritizationIsolation of pool true saleClaim only against the pool no impact of issuer bankruptcyTypically both principal and interest repaid monthlyCredit enhancement helps in getting a higher rating than the issuer

    Traditional DebtThe issuer holds the assets provides securityClaim against the issuer companyMonthly interest; bullet principal paymentsRating cannot be higher than the issuer debt rating

  • Securitization vs Bilateral AssignmentReceivables based financingSecuritization through issue of tradable instruments would attract a wider investor base and thereby result in lower cost of funds to the Originator Full RecourseOn Balance SheetNo capital ReliefNo gain on SaleBilateral or CMILimited RecourseOff Balance SheetRelease of capitalPossible gain on SaleNo capital market investorsLimited RecourseOff Balance SheetRelease of capitalPossible gain on SaleBanks and capital market investorsLoan/Advance Debenture Backed by charge & EscrowBilateral Assignment of receivables between Originator & PurchaserSecuritization vide issue of tradable instruments by an SPV

  • Bilateral Assignment: Structure DiagramOriginatorObligorsPurchaser/ InvestorServicerCredit Rating AgencyCredit EnhancementLease/Loan/Other AgreementsPayment towards ObligationPurchase ConsiderationAssignmentOf ReceivablesCredit enhancement and rating may be optional in a bilateral transaction depending on the comfort of the purchaser / investor


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