Benefits of Securitisation
Global Globalisa isati tion, on, deregu deregulat lation ion of financi financial al market marketss and growin growing g cross cross border border busine business ss transactio transactions ns has reset the ambience ambience among financial institutions, institutions, increasing increasing manifold manifold opportunities for financial engineering. Securitisation increases the lending capacity of an FI without without having having to find find additio additional nal capital capital or deposit deposits. s. Securi Securitis tisati ation on facil facilita itates tes specia specialis lisati ation on and is gainin gaining g wide wide accept acceptance ance as the most most innova innovativ tivee form form of asset asset financi financing. ng. A signif significa icant nt impact impact of securi securiti tisat sation ion is the profil profiling ing and placem placement ent of different risks and rights of an asset with the most efficient owners. It provides capital relief, improves market allocation efficiency, expands opportunities for risk sharing and risk pooling, increases liquidity, improves the financial ratios of FIs and banks, creates multiple streams of cash flows for the investors, is tailored to the risk profile of a number of customers customers and facilitate facilitatess asset-liab asset-liabilit ility y management. management. The requirement requirementss for capital capital adequ adequac acy y in rece recent nt year yearss have have also also moti motiva vate ted d fina financ ncia iall inst instit itut utio ions ns and banks banks to securitise. On the demand side, investors are motivated to buy these securities as they view these as having risk characteristics, ch aracteristics, compatible with the profile. Benefits to the Originators, especially FIs
For FIs, securitisation is an opportunity offered in the form of capital relief, capital allocation efficiency, and improvements in financial ratios. •
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Lower cost of borrowing: Securitisation reduces the total cost of financing as assets are transferred to a separate bankruptcy-resistant entity. To that extent FIs need not maintain capital to maintain their capital adequacy norms. Also, entities with a riskier credit profile can benefit from lowered borrowing costs. A source of liquidity: FIs could face a liquidity crunch either due to their risky credit profile or delayed receivables. The liquidity provided by securitisation acts as a very powerful tool, that FIs could use to adjust the asset mix quickly and effi effici cient ently ly.. Furt Furthe her, r, the the risk riskss in an asse assett port portfo foli lio o can can be iden identi tifi fied ed and and apportioned to arrive at an effective asset mix. Improved financial indicators: Securitisation leads to capital relief that improves the company’s leverage and in turn the Return on Equity. The repercussions of securitisation on the balance sheet of a company can vary depending on the strate strategy gy for its capital capital struct structure ure and its appeti appetite te for increa increasin sing g or decreas decreasing ing leverage. Asset-Liab Asset-Liabilit ility y Management: Management: Securitisa Securitisation tion offers offers the flexibilit flexibility y in structuri structuring ng and timing cash flows to each security tranche. It provides a means whereby customised securities can be created which helps in matching the tenure of the liabilities and assets. Diversified fund sources: By securitising its receivables, the instrument of which could be sold to global investors, the originator has an opportunity to diversify its funding source.
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Positive signals to the Capital Markets: Lenders are at times trapped in a situation where they cannot rollover their debt due to downgrading of their ratings, possibly due to economic changes. Under these circumstances, securitisation enables lenders like FIs to increase the rating of debt much higher than that of the issuer through the intrinsic credit value of the asset. This enables the FIs to obtain funding. An avenue for divestiture: Securitisation offers an optimal exit route for entities that wish to exit a business comprising of financial assets without going through the mergers and acquisition route.
Benefit to the SPV •
An SPV which services its ultimate investors properly gains appreciation in the Capital Market. In course of time, they can be appointed as Trustees for other assets as well.
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In case the cash flows fall through, the SPV is protected, since the Security of the assets is vested in him.
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The SPV gets a regular fee based income for acting as the intermediary.
Benefits to the Investors
Investors purchase risk-adjusted securities based on its level of maturity and seniority. For instance, an auto loan or credit card receivables backed paper carries regular monthly cash flows, which can match the requirements of investors like mutual funds. •
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New Asset Class: Securitised products provide new investment avenues for investors to enhance their return or to diversify their portfolio. For instance, an investor in the United States whose investment is predominantly in US assets can diversify by investing in securities offered by an SPV in Asia. Risk Diversification: As the underlying pool of receivables is spread across diverse customers the investors need not have a thorough understanding of the underlying assets. The investor is insulated from customer specific event risk. Customisation: Securitisation of financial assets allows tailoring of cash flows to the risk profile of the investors. A certain stream of cash flow coming from an underlying asset pool can be broken into tranches and offered as per the investor risk appetite. Decoupling with Originator: The investor is insulated from the credit profile of the Originator. This separation of the Originator and the investor helps at the time of bankruptcy or default or credit downgrades.
Disadvantages of the Securitization : •
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Securitization is an off-balance sheet item. The originator may thus be able to hide the true picture of its financial health by securitization of its good assets and keeping only sub-standard assets in its portfolio. Another disadvantage of securitization is its opagueness. For example, a company may have taken huge liabilities but that may not be reflected in the balance sheet or conventional financial statements of the company. This is especially true where the securitisation is with recourse i.e. if the receivables which have been securitised to the SPV, but later become NPA. In such a case, the SPV will have the right to recover the dues from the originator. Thus, in such cases, it may be realized later on that the originator actually had a large amount of contingent liabilities but these were not reflected in the balance sheet.
