Steps in process of securitization, Financial Management

Assignment Help:

Process

The process of Securitization involves the following steps:

  1. Transfer of assets by the originator (person holding the assets) to an entity (company or a trust) specially created for the purpose called Special Purpose Vehicle (SPV). Special Purpose Vehicle is a separate entity formed exclusively for charting this deal and providing funds to the originator. The SPV may be formed as a company under the Companies Act or a trust under the Indian Trusts Act.

  2. The assets transferred should preferably be homogenous in nature in terms of the risk attached to them and/or maturity such that the pooling of such assets would be convenient. SPV divides this pool of assets transferred by the originator into marketable securities called Pay or Pass-Through Certificates and resells them to various investors.

  3. Investors may either be banks, mutual funds or state or the central government. The investor may even be the parent company or the financier of the originator.

  4. The issue of securities is managed by a merchant banker, who may underwrite the whole issue, or a syndicate of merchant bankers. The originator continues to administer the loan portfolio for some fee and he passes the collections to the trust which services the securities.

Apart from the SPV, a trustee is normally appointed to oversee the process of securitization. An escrow account is created for the purpose of distributing the receivables to the investors in the deal. The trustee maintains such an escrow account.

Figure 

754_process of securitization.png

In India, mutual funds are allowed to invest not more than 5% of their total corpus in the securitized instruments. Also, unlike in the West, insurance companies are not allowed to invest in securitization deals. This, however, is expected to be relaxed with the entry of private insurance players.

Theoretically, any resource with predictable cash flows can be securitized:

  1. Future rentals of a fishing boat.

  2. Remuneration that is paid to a movie star.

  3. Bills that are made to a five-star hotel.

  4. Tickets that are to be sold at a cinema hall.

  5. Future billings for an airline.

  6. Dues that have to be paid by the state electricity boards to the power generating companies.

  7. Credit card receivables.

  8. Loans that are to be paid to the housing finance company.

  9. Mortgages in lieu of future payment.

  10. Hire purchase receivables.

  11. Non-performing assets of a financial entity.


Related Discussions:- Steps in process of securitization

Cost of equity share capital, Q. Cost of Equity Share Capital? Cost of ...

Q. Cost of Equity Share Capital? Cost of Equity Share Capital: - The cost of equity is the utmost rate of return that the company should earn on equity financed position of its

What is the tolerable error, What is the Tolerable error In addition t...

What is the Tolerable error In addition to looking at material differences individually the auditor must list all the differences (material or not) and consider in total wheth

What do you signify by cost of capital, Q. What do you signify by Cost of C...

Q. What do you signify by Cost of Capital? What do you signify by 'Cost of Capital'? What is its meaning and what are the problems in determination of cost of capital? Ans.

Describe societys interests can influence financial managers, Describe how ...

Describe how society's interests can influence financial managers. Sometimes the interests of a business firm's owners aren't the same as the interests of society.  For illustr

Common-size balance sheet and income statement, The question to be answere...

The question to be answered is : "Since the 1990 opening of stock exchanges, China started to use financial statements to determine the performance of listed companies. What were c

Downside risk of convertible bonds, When the underlying stock becomes...

When the underlying stock becomes worthless, the percentage price declines the investors experience is given by, Percentage of Downside Risk=

Are there any ways to analyze and value seasonal businesses, Are there any ...

Are there any ways to analyze and value seasonal businesses? Seasonal businesses can be valued by discounting flows using annual data, but this needs some adjustments. The righ

Multi-period compounding or else future value, Multi-period Compounding or ...

Multi-period Compounding or else Future Value :- If the company determination compounding interest half-yearly (semi-annually) instead of annually then investors will gain as he wi

Explain cash flow budget and npv in lkl plc, LKL PLC Project VZ (...

LKL PLC Project VZ (a) Cash Flow budget and NPV WORKINGS

What is cash credit, Q. What is Cash Credit? A cash credit is an arrang...

Q. What is Cash Credit? A cash credit is an arrangement by which a bank allows his customer to borrow money up to a certain limit against some tangible securities or guarantees

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd