Presentation on the concept of

* Securitisation *

Flow of Presentation
Definition of Securitisation

Parties to Securitisation
Process of Securitisation

Pass and Pay Through Structure

Motivation and Benefits Scope of Securitisation Constraint of Securitisation in India Case Study: NHB - HDFC RMBS Issue

Definition of Securitisation
Securitisation is the process of pooling and repackaging of
homogenous illiquid financial assets into marketable securities that can be sold to investors. "Selling the Cash flow generated from the assets (either existing or future) against the charge of the assets, by converting them into homogenous market negotiable instruments is known as Securitisation."

Parties to Securitisation
Primary Parties :
The SPV The Investors The Originator

Parties to Securitisation
Other Parties: The Obligor(s) The Rating Agency Administrator or Servicer Agent and Trustee Structurer

What type of assets can be securitised ?

Existing assets in the form of Long Term Receivables ( E.g. Housing Loans)
Existing assets in the form of Short Term Receivables ( E.g. Credit Card Receivables) Existing physical assets in the nature of Current Assets (E.g. Stock) Existing Fixed Assets (E.g. Aircraft Lease)

Future Receivables (Infrastructure projects)

The Procedure
Selection and pooling of assets

These assets are sold or pass through another orgn called Special Purpose Vehicle(SPV)

The SPV then splits the pool into units/securities sells them to the investors at large and reimburses it.

Securitisation Process
Obligor (s)
Interest & Principal Original Loan Sale of Assets

Ancillary Service Providers

Credit Enhancement, Liquidity Adjustment,etc. Issue of Securities Servicing of Securities

Originator
Consideration for assets purchased

SPV (Assignee & Issuer)

Investors
Subscription of Securities Guarantee for Timely Payment

Credit Rating of Securities

Rating Agency

Guarantor

Structurer

Process of Securitisation
Estimation of the Cash Flows Creation of SPV

SPV issues securities/notes to Investors

Investors - Proceeds of the issue of securities to

SPV
Collection and Servicing from the Obligors

Process of Securitisation

Pass Over to the SPV

Reinvestment of Cash Flows Structure) Payment to the Investors Originators Residuary Profit (Pay Through

Pass Through Structure

Pay Through Structure

Motivation and Benefits

Capital relief Capital planning Capital requirement

Recognising profits
Changing the timing of income

Raising funds at cheaper rates

One time fee income

Motivation and Benefits

Influence on financial ratios

Providing Market Access

Overcoming constraints of Market

Segmentation

Strategic tool
Liquidity

Motivation and Benefits

Risk Tranching / Unbundling

Asset-Liability Management Diversification of assets Systems/Reporting Pooling

Scope of Securitisation

Mortgage Backed Securities (MBS)

Asset Backed Securities (ABS) Securitisation of infrastructure receivables

Future Receivables

Major Constraint of Securitisation in India

Legal Issues Taxation Issues

Accounting Issues
Lack of Third Party Servicers

Lack of data across economic cycles

Lack of sophisticated Information Systems Co-mingling of cashflows

NHB - HDFC RMBS Issue

Issue Structure
Class A PTC of the loan originated from HDFC in the state of Gujarat, Maharashtra, Karnataka and Tamilnadu amounting to Rs. 59.7 Crores.

Tenure of the Class A PTCs is 83 months.

Interest Rate to be determined through Book Building route (11.35% to 11.85%). Listing in the Wholesale Debt Market of NSE.

Issue Structure
Rating "AAA (so)" by CRISIL. Interest on Application Money - 10%. Deemed date of Allotment - 1st September 2000.

Interest and Principal Payment Dates - 1st Business working day of the every month.

Salient Features of the Issue

Isolation of the assets from the Originator by forming a

SPV by NHB.
"Legal True Sale" of assets to an SPV. "Bankruptcy Remoteness" from the Originator. Issuance of securities collateralized by the underlying assets by the SPV to investors. Reliance by the Investors of the performance of the assets for the repayment - rather than the credit of the Originator (HDFC) or the issuer (the SPV).

Salient Features of the Issue

NHB will act as sole Trustee and will hold and administer the receivables as Trust property for the benefit of the PTC holders. HDFC will act as Servicing and Paying Agent (S&P Agent). Credit Rating by CRISIL as "AAA (so)".

PTC to be listed on 'WDM" at NSE.

PTC issued in the state of Karnataka.

Hierarchy of Payments
Class A principal.
Fees to Service Providers - Trustee, Servicing and Paying Agent, Rating Agency, legal and other out-ofpocket expenses, if any, in the said Order.

Class A interest.
Fees to HDFC towards 'Corporate Guarantee' provided as a Credit Enhancement. Class B principal (only after retiring Class A PTCs). Class B income.

Pool Selection Criteria

The loans were current at the time of selection The loans have a minimum seasoning of 12 months.

The pool consists of Mortgage loans in the state of Gujarat, Maharashtra, Tamilnadu an Karnataka. All the borrowers in the pool are individual.

Pool Selection Criteria

Maximum LTV ratio is 80%. EMI to Gross Income ratio is less than 40%. EMIs should not be outstanding for more than one month. Loan size is in the range of Rs. 18,000 to Rs. 10 Lakhs.

Borrowers in the pool have one loan contract with the HFC.
The HFC has not taken any refinance with respect to these loans. Loans are free from any encumbrances/charge on the date of selection.

Credit Enhancements
Subordinated Class B PTC payouts Corporate Guarantee Structure of HDFC

Case Study - SICOM Limited

ST Deferral

GoM
Disc. Rate X% Repayments Future Cash Inflows

Pvt. Cos.

SICOM
Fees

SPV
Funds Management Fees

Treasury
Deb. @ X%-Fees-Exps.-Exp. Returns

Credit Rating Agency

Investors