10 Feb

Securitization CA Final SFM (Strategic Financial Management)

Securitization CA Final SFM

Securitisation a chapter in Strategic Financial Management (SFM). This is an important chapter from the CA Exam point of view as well. The concept has been explained with a comprehensive example, to make sure the concepts are very clear. It mainly talks about Debt Securitisation, Mortgage-Backed Securities, Securitisation Process, Credit Rating Agency, Special Purpose Entity, Mortgage Pool, Raising Funds, Financing through Securitisation. The video is in Hindi; and suitable for anyone who wants to understand the above concepts of Mergers and Acquisitions in this language.

Video on Securitization CA Final SFM (Strategic Financial Management) – English

Video on Securitization CA Final SFM (Strategic Financial Management) – Hindi

 

Some Important Concept

Broadly, the participants in the process of securitization can be divided into two categories; one is Primary Participant and the other is Secondary Participant.

Primary Participants

Primary Participants are the main parties in this process. The 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 and receives the funds generated through the sale of such assets. The originator transfers both legal as well as beneficial interest to the Special Purpose Vehicle (discussed later).

(b)Special Purpose Vehicle: Also, called SPV is created for the purpose of executing the deal. Since issuer originator transfers all rights in assets to SPV, it holds the legal title of these assets. It is created especially for the purpose of securitization only and normally could be in the form of a company, a firm, a society or a trust.

The main objective of creating SPV is to remove the asset from the Balance Sheet of Originator. Since SPV makes an upfront payment to the originator, it holds the key position in the overall process of securitization. Further, it also issues the securities (called Asset Based Securities or Mortgage Based Securities) to the investors.

(c) The Investors: Investors are the buyers of securitized papers which may be an individual, an institutional investor such as mutual funds, provident funds, insurance companies, mutual funds, Financial Institutions etc. Since they acquire a participating in the total pool of assets/receivable, they receive their money back in the form of interest and principal as per the terms agree.

Secondary Participants

Besides the primary participant’s other parties involved in the securitization process are as follows:

(a)Obligors: Actually they are the main source of the whole securitization process. They are the parties who owe money to the firm and are assets in the Balance Sheet of Originator. The amount due from the obligor is transferred to SPV and hence they form the basis of the securitization process and their credit standing is of paramount importance in the whole process.

(b) Rating Agency: Since the securitization is based on the pools of assets rather than the originators, the assets have to be assessed in terms of its credit quality and credit support available. Rating agency assesses the following:

(i)Strength of the Cash Flow.

(ii) The mechanism to ensure timely payment of interest and principal repayment.

(iii) The credit quality of securities.

(iv) Liquidity support.

(v) Strength of legal framework. Although rating agency is secondary to the process of securitization it plays a vital role.

(c)Receiving and Paying agent (RPA): Also, called Servicer or Administrator, it collects the payment due from obligor(s) and passes it to SPV. It also follows up with defaulting borrower and if required initiate appropriate legal action against them. Generally, an originator or its affiliates acts as servicer.

(d)Agent or Trustee: Trustees are appointed to oversee that all parties to the deal perform in the true spirit of terms of the agreement. Normally, it takes care of the interest of investors who acquire the securities.

(e) Credit Enhancer: Since investors in securitized instruments are directly exposed to the performance of the underlying and sometime may have limited or no recourse to the originator, they seek additional comfort in the form of credit enhancement. In other words, they require a credit rating of issued securities which also empowers marketability of the securities.

Originator itself or a third party say a bank may provide this additional context called Credit Enhancer. While originator provides his comfort in the form of over-collateralization or cash collateral, the third party provides it in the form of a letter of credit or surety bonds.

(f) Structurer: It brings together the originator, investors, credit enhancers and other parties to the deal of securitization. Normally, these are investment bankers also called arranger of the deal. It ensures that deal meets all legal, regulatory, accounting and tax laws requirements.

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