Securitization

Securitization;
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

Borrowers (Obligors)

Receivables

Originator (Bank/FI)

Loan Cash Liquidity Support Cash SPV Sell Receivables Credit Enhancement Securities

Investors

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 Sale”