Securitization is the packaging of a pool of financial assets into marketable securities. In simpler words, securitization is the process in which certain types of assets are pooled so that they can be repackaged into interest bearing securities. Debt securitization is a process of transformation of receivables into security which may be traded later in the open market.
Securitization process includes
● The originator or sponsor
● Special purpose vehicle (SPV)
● Merchant or investment banker
● Credit rating agency
● Servicing agent- receiving or paying agent
● Obligor or adaptor or borrowers
● Prospective investors i.e. the buyers
Let’s understand each point in detail:
The originators sponsor is the entity on whose books the assets to be securitised exist. It is the prime mover of the deal. The originator transfers both the legal and beneficial interest in the assets to the SPV.
The SPV is the issuer or entity, who would typically buy the assets from the originator.
The investors may be in form of individuals or institutional investors like financial institution, mutual funds, provident fund, insurance companies etc. They buy a participating interest in the total pool of receivables and receive their payment in the form of interest and principal as per agreed terms.
The obligor is the originator's debtor. The amount outstanding from the obligor is the asset that is transferred to the SVP.
In rate agency the investors take on the risk of the asset pool rather than the originator, an external credit rating agency plays an important role. The rating process ensures that full and timely payment by the process of selection of loans is done.
Merchant Banker accepts the responsibility of overseeing that all the parties perform in accordance with the secularization trust agreement. It is appointed to look after the interest of the investors. They can play a big role in asset securitization.
The various steps involved in the process of securitization are follows
- Identification process
The lending financial institution either a bank or any other institution which decide to go for securitization is called an originator. This process of selecting a pool of loans and receivables from the asset portfolios for secularization is called identification process.
- Transfer process
After the identification processes is over, the selected assets are then passed to another institution which is ready to help the originator to convert those assets into securities. This institution is called special purpose vehicle.
- Issue process
After this transfer process is over, the SPV takes up the task of converting this asset of various types of different maturities. It is on this basis the SPV issue securities to investors.
- Redemption process
The redemptions and the payment of interest on these securities are facilitated by the collections received by the SVP. The service agent is responsible for collecting the principal and interest payment on assets pooled.
- Credit rating process
Since the pass-through certificates have to be publicly issued, they require a credit rating by a good credit rating agency, so that they are easily acceptable. The rating provides a guarantee a sense of confidence to the investor with regard to the timely payment of principal and interest by SPV.