For Funding & Risk Sharing
Dinesh Warusavitharana, CFA
What is securitization ?
Securitization is the pooling of cash flows and the issuance of securities backed by underlying assets. The repayment of securities is solely dependent on the performance of the assets Securitization de-links the credit risk of the issuer from the securitization transaction
Basic Model of Securitization
Loan Cash Liquidity Support Cash SPV Sell Receivables Credit Enhancement Securities
Types of securitization
Residential mortgage backed securities (MBS) Asset backed securities (ABS) Collateralized debt obligations (CDO) Commercial mortgage backed securities (CMBS) Future flow securitization
Requirements for securitization
Legal environment Accounting environment Regulatory environment Tax environment Back office systems/Information System Strong investor demand
Why securitize assets ?
Efficient funding Lower Cost Alternative investor base Issuer’s credit rating becomes irrelevant Improving balance sheet structure Improves capital utilization Releases capital
Why Securitize assets ?
Arbitrage – yield and term Enables better utilization of resources Risk management “Dress up” accounting profits if “true sale” criteria is satisfied
Benefits to investors?
Better security Greater moral responsibility Create instruments to match investment objectives Better and more resilient credit ratings
Risks in securitization
Risk Credit Risk Recovery Risk Liquidity Risk Pre Payment & Yield Risk
Risk Mitigant Tranching, Cash reserves, Over Collateralization Loan to Value (LTV) Asset Depreciation Rates Liquidity Support Portfolio Seasoning
Static Pool Loss Curve
Static Pool Delinquency Experience
Static Pool Pre-payment Curve
Securitization in Sri Lanka ?
Predominantly used for Auto Leases Not securitization, but Asset Backed Lending No “True...