What is securitisation?
Securitisation is a process by which the forecast future income of an entity is transformed and sold as debt
instruments such as bonds. This allows the company to get cash upfront, which can be productively used. It is
done by suitably “repackaging” the cash flows or the free cash generated by the firm issuing these bonds.

A finance company with car loans can raise funds by selling these loans to another entity. But this sale can also
be done by “securitising” its car loans portfolio into instruments with a fixed return based on the maturity
profile. If the company has Re. 100 crore worth of car loans and is due to earn 17% income on them, it can
securitise them into instruments with 16% return with safeguards against defaults. These could be sold by the
co. to another if it needs funds before these repayments are due. The principal and interest repayment on the
securitised instruments are met from the securitized assets.
Selling these securities will not only provide the co with cash before maturity, but also the assets (loans) will
go out of the books of the finance co once they are securitised, a good thing as all risk is gone.

What can be securitised?
Any asset that generates funds over time can be securitized, including repayments under car loans, money
credit card dues, airline ticket sales, road toll collections, and sales of petro products. In fact, artists have even
raised funds by securitising the royalty they will get out of future sales of their records.

It works well if the securitised asset is homogenous w.r.t credit risk and maturity. Ideally, there should be
historical data on the portfolio performance and the issuing company on credit quality and repayment speed.

How does it differ from financing through a straight bond or debenture issue?
Unlike a traditional bond issue, the repayment of funds raised through securitisation is not an obligation of the
originator, or the finance company issuing the securitised instrument. In a straight bond or debenture issue, if
the company goes bust, the investors would have a tough time getting their funds back. However, if one
invests in a securitised instrument, investors are assured of interest payments even if the finance company
goes bust, as the securitised loans are separated from the finance company’s books through a special purpose
vehicle which holds these assets. At the same time, as securitised instruments can be traded, the investor has
liquidity as the securitised bond can be sold in the market.

How does it benefit the issuer?
The issuer can raise longer maturity funds than he would be able to do, otherwise. For instance, in case of toll
roads, the costs can normally be recovered only over a very long period. A long-term repayment loan may not
be easily available. Here, securitisation can provide a solution. For instance, conventional loans are generally
backed by the borrower’s existing assets. In many cases, the borrower may be unable to offer the required
collateral. The process helps the borrower raise funds against future cash flows rather than existing assets.

What makes up a securitisation transaction?
The entities involved in the securitisation transaction are the seller , the issuer (special purpose vehicle which
issues the securities), the servicer (which manages the portfolio), the trustee and the credit rating agency.
Other entities involved are credit enhancement providers and the investors.

What kinds of roles are performed by each of these players?
The originator is the party which has a pool of assets, which it can offer for securitisation and is in need of
immediate cash. The Special Purpose Vehicle (SPV) is the entity that will own the assets once they are
securitised. Usually, this is in the form of a trust. It is necessary that the assets should be held by the SPV as
this would ensure that the investors’ interest is secure even if the originator goes bankrupt.
The servicer is an entity that will manage the asset portfolio and ensure that timely payments are made. The
credit enhancer can be any party, which provides a reassurance to the investors that it will pay in the event of
a default. This could take the form of a bank guarantee also.