Securitization of Debt
G. Shiva1
Securitization Defined
Securitization of debt, or asset securitization as is more often referred to, is
a process by which identified pools of receivables, which are usually
illiquid on their own, are transformed into marketable securities through
suitable repackaging of cashflows that they generate. Securitization, in
effect, is a credit arbitrage transaction that permits for more efficient
management of risks by isolating a specific pool of assets from the
originator's balance sheet. Further, unlike the case of conventional debt
financing, where the interest and principal obligations of a borrowing entity
are serviced out of its own general cash flows, debt servicing with asset-
backed securities (ABS) is from the cash flows originating from its
underlying assets.
What can be Securitized?
In concept, all assets generating stable and predictable cash flows can be
taken up for securitization. In practice however, much of the securitised
paper issued have underlying periodic cashflows secured through contracts
defining cash flow volumes, yield and timing. In this respect, securitization
of auto loans, credit card receivables, computer leases, unsecured consumer
loans, residential and commercial mortgages, franchise/royalty payments,
1 Head – Fixed Income & Money Markets, Citibank, N.A., India
Paper presented in October 1997
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THE FUTURE OF INDIA’S DEBT MARKET
and other receivables relating to telecom, trade, toll road and future export
have gained prominence. Typically, asset portfolios that are relatively
homogeneous with regard to credit, maturity and interest rate risk could be
pooled together to create a securitization structure. However, to make
reasonable estimates of the credit quality and payment speed of the
securitised paper, it would be essential to analyse the historical data on
portfolio performance over some reasonable length of time.
Why Securiti