For Funding & Risk Sharing
Securitization;
Dinesh Warusavitharana, CFA
What is securitization ?What is securitization ?
Securitization is the pooling of Securitization is the pooling of cash flows and the issuance of cash flows and the issuance of securities backed by underlying securities backed by underlying assets.assets.The repayment of securities is The repayment of securities is solely dependent on the solely dependent on the performance of the assetsperformance of the assetsSecuritization deSecuritization de--links the credit links the credit risk of the issuer from the risk of the issuer from the securitization transactionsecuritization transaction
Basic Model of SecuritizationBasic Model of Securitization
Borrowers(Obligors)
Originator(Bank/FI)
SPV
Investors
LiquiditySupport
CreditEnhancement
Loan
Receivables
Sell Receivables
Securities
Cash
Cash
Types of securitization Types of securitization
Residential mortgage backed Residential mortgage backed securities (MBS) securities (MBS) Asset backed securities (ABS)Asset backed securities (ABS)Collateralized debt obligations Collateralized debt obligations (CDO)(CDO)Commercial mortgage backed Commercial mortgage backed securities (CMBS)securities (CMBS)Future flow securitizationFuture flow securitization
Requirements for Requirements for securitization securitization
Legal environmentLegal environmentAccounting environmentAccounting environmentRegulatory environmentRegulatory environmentTax environmentTax environmentBack office systems/Information Back office systems/Information SystemSystemStrong investor demandStrong investor demand
Why securitize assets ?Why securitize assets ?
Efficient funding Efficient funding Lower CostLower CostAlternative investor baseAlternative investor baseIssuer’s credit rating becomes Issuer’s credit rating becomes irrelevantirrelevant
Improving balance sheet structureImproving balance sheet structureImproves capital utilizationImproves capital utilizationReleases capital Releases capital
Why Securitize assets ?Why Securitize assets ?
Arbitrage Arbitrage –– yield and termyield and term
Enables better utilization of Enables better utilization of resourcesresources
Risk managementRisk management
“Dress up” accounting profits if “Dress up” accounting profits if “true sale” criteria is satisfied“true sale” criteria is satisfied
Benefits to investors?Benefits to investors?
Better security Better security Greater moral responsibilityGreater moral responsibilityCreate instruments to match Create instruments to match investment objectivesinvestment objectivesBetter and more resilient credit Better and more resilient credit ratings ratings
Risks in securitization Risks in securitization
Credit Risk
Recovery Risk
Liquidity Risk
Pre Payment & Yield Risk
Tranching, Cash reserves,Over Collateralization
Portfolio Seasoning
Liquidity Support
Loan to Value (LTV) Asset Depreciation Rates
Risk MitigantRisk
Static Pool Loss Curve Static Pool Loss Curve
Static Pool Delinquency Static Pool Delinquency Experience Experience
Static Pool PreStatic Pool Pre--payment payment Curve Curve
Securitization in Sri Lanka ?Securitization in Sri Lanka ?
Predominantly used for Auto Predominantly used for Auto LeasesLeasesNot securitization, but Asset Not securitization, but Asset Backed LendingBacked LendingNo “True Sale” No “True Sale” --> “On Balance > “On Balance Sheet financing” Sheet financing” The credit rating of the The credit rating of the transaction is linked to the transaction is linked to the issuers credit rating issuers credit rating Commingling risk of cash flows?Commingling risk of cash flows?
Current Model in Sri LankaCurrent Model in Sri Lanka
Borrowers(Obligors)
Originator(Bank/FI)
Trust
Investors
CreditEnhancement
Loan
Receivables
Pledge
Receipts
Securities
Cash
Cash
Recourse
Risks management through Risks management through securitization securitization
Service & Collection
Funding
Originate 1%
1%
6%
Loan 8%
Retain the client without the risk !!Retain the client without the risk !!
Basic CDO structureBasic CDO structure
Bank
Senior notes
Mezzanine notes
Equity
SPV
Loans
Cash Funds
Coupons & principal
Impact to originatorImpact to originator
Not exposed to Credit & Interest Not exposed to Credit & Interest Rate RiskRate RiskNet income would be close Net income would be close –– due to due to originating & servicing fees as well originating & servicing fees as well as the excess spreadas the excess spreadCash flows improveCash flows improveBetter utilization of capital & Better utilization of capital & infrastructureinfrastructureImproves ROA / ROEImproves ROA / ROE
Impediments for Securitization in Impediments for Securitization in Sri LankaSri Lanka
Finance Leasing ActFinance Leasing ActConcerns on the Loss of Concerns on the Loss of ParateParatePowers ?Powers ?Transaction CostTransaction CostRegistration ProcedureRegistration ProcedurePoor information systemsPoor information systemsLack of educationLack of education
Practical Issues in undertaking Practical Issues in undertaking Securitization Securitization
Greater disclosure of information Greater disclosure of information Internal systems may take time to Internal systems may take time to generate the information requiredgenerate the information requiredInitial cost and time involved in Initial cost and time involved in the first transaction will be higher the first transaction will be higher than other forms of financingthan other forms of financingLess flexible covenantsLess flexible covenants
Way forward….Way forward….
Finance Leasing Act needs to be Finance Leasing Act needs to be amended to facilitate securitizationamended to facilitate securitization
New Securitization Act ?New Securitization Act ?
Transaction cost Transaction cost
Registration Procedures Registration Procedures
Way forward….Way forward….
Clear accounting treatment for Clear accounting treatment for securitizationsecuritization
Clear tax treatment for Clear tax treatment for securitizationsecuritization
Internal information systems need Internal information systems need to be modified to be modified
Way forward….Way forward….
Investors need to get used to Investors need to get used to taking on the risk of the taking on the risk of the securitized assetssecuritized assetsInvestors need to be prepared to Investors need to be prepared to accept unscheduled cash flowsaccept unscheduled cash flowsRMBS could be undertaken RMBS could be undertaken under the existing legal under the existing legal framework framework
Panel DiscussionPanel Discussion
Mr. Mr. VajiraVajira KulatilakaKulatilakaCEO, NDB Investment BankCEO, NDB Investment Bank
Mr. Naomal GoonewardenaMr. Naomal GoonewardenaPartner, Partner, NithyaNithya PartnersPartners
Mr. Ajith FernandoMr. Ajith FernandoCEO, Capital AllianceCEO, Capital Alliance
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