...Asset-Backed Securities The Securitization Process Prof. Ian Giddy Stern School of Business New York University Asset-Backed Securities q The basic idea q What’s needed? q The technique q Applications q Typical sequence Copyright ©2001 Ian H. Giddy globalsecuritization.com The Securitization Process3 Securitization of Assets Securitization is the transformation of an illiquid asset into a security. q For example, a group of consumer loans can be transformed into a publically-issued debt security. q A security is tradable, and therefore more liquid than the underlying loan or receivables. Securitization of assets can lower risk, add liquidity, and improve economic efficiency. q Sometimes,assets are worth more off the balance sheet than on it. q Copyright ©2001 Ian H. Giddy globalsecuritization.com The Securitization Process4 What is the Technique for Creating Asset-Backed Securities? A lender originates loans, such as to a homeowner or corporation. q The securitization structure is added. The bank or firm sells or assigns certain assets, such as consumer receivables, to a special purpose vehicle. q The structure is legally insulated from management q Credit enhancement and rating agency reviews q The SPV issues debt, dividing up the benefits (and risks) among investors on a pro-rata basis q Copyright ©2001 Ian H. Giddy globalsecuritization.com The Securitization Process5 Securitization: The Basic Structure SPONSORING COMPANY ACCOUNTS...
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...Case studies 4 Zubair Chapter 9 SUKUK BONDS VERSUS SECURITIZATION Sukuk are of two general types: Islamic bonds and securitizations. Islamic bonds are based upon the credit of an entity that is participating in the transaction, such as the issuer, a guarantor or another provider of credit support. Securitizations involve a transfer of assets from an originator into a trust or similar special purpose vehicle (SPV) with the issuance of securities by that trust or SPV. Payments on the issued securities (the sukuk) are derived solely from the payments received in respect of those transferred assets, rather than any general credit of an issuer or participating party. Thus, securitizations are based upon the credit of the securitized assets. To date, most sukuk issuances have been Islamic bond issuances. True securitization sukuk issues are rare, and issues of this type that have been rated by a major international rating agency are nonexistent. While both types of issuances access the capital markets and are necessary for balanced growth of the capital markets, true securitizations have benefits that transcend those available from bond issuances alone. Securitizations allow, often require, broad diversification of the assets in the securitized pool. The originator of the transferred assets uses the securitization to manage its balance sheet and capital structure. The originator transfers assets that generate deferred payments and receives an immediate cash payment from the capital...
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...|Securitization | | | |Project for Final Evaluation | | | |6/13/2009 | | | |Priyanka and Baljeet | This project with International Autotrac Finance Ltd as a combination of hard works & challenges and was both exciting and simulating. No project being individualistic efforts, this is one too is a combination of the efforts and views of many people. I would like to express my gratitude to all. First I would like to thanks Dr. Gurwinder who has given me the opportunity to do summer training in Sonlaika International Tractors Limited. I am very thankful to Mr. Rohit Mohan (Manager Finance cum Company Secretary), without his efforts it would have been impossible for me to get and complete project. I want to pay my regards to Ms Richa Gautam for being my corporate guide and as well as for continuous encouragement and guidance which he has given...
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...research and further study (Research Proposal)……………….3 Further explanation of the intended research topics………………………………………..4 Securitization…………………………………………………………………………………………………..4 Credit Derivatives…………………………………………………………………………………………….6 Hybrid Products……………………………………………………………………………………………….7 Re-Securitization……………………………………………………………………………………………..8 Contribution of these products towards Financial Crisis…………………………………..8 Improper Risk Management role in Financial Crisis………………………………………….9 Risks………………………………………………………………………………………………………………..10 Market Risk……………………………………………………………………………………………………..11 Credit Risk……………………………………………………………………………………………………….11 Liquidity Risk……………………………………………………………………………………………………11 Interest Rates and the Financial Crisis………………………………………………………………12 Relation between low interest rate and financial crisis…………………………………….12 Role of Rating Agencies……………………………………………………………………………………14 Structure Finance Products and Rating Agencies……………………………………………..14 Regulations Then and Now………………………………………………………………………………15 BASEL II……………………………………………………………………………………………………………16 Enhancements of Basel II…………………………………………………………………………………18 The Resecuritisation Exposure Using IRB Approach………………………………………….18 The Resecuritisation Exposure Using Standardized Approach…………………………..18 Operational Criteria for Credit Analysis……………………………………………………………19 Securitization Liquidity Facilities – Standardized Approach………………………………19 Conclusion……………………………………………………………………………………………………….21 SOURCES …………………………………………………………………………………………………………22 ...
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...controlling the business. Subsidiary has completely full function while SPV does not do full range of business. In general, SPV is typically used by companies to isolate the firm from financial risk, to hide debt or ownership, to minimize bankruptcy risk and obscure relationships between different entities that are in fact related to each other. Commonly, because of the financial risk of a large project, the company will transfer assets to the SPV for management and narrow the risks by putting the entire firm at stake. Most importantly, SPV is formed as a separate company that theoretically has no connection with the sponsor. In order words, the owner of SPV legally must show no relationship to the main company. Furthermore, besides all of the reasons listed above of establishing a SPV, securitization is a must known, which is used to securitize loans. Asset securitization provides another way for a company to raise cash in the capital markets as well as transfer risk of default on high-risk debt, such as credit card receivables. If asset securitization could be a desirable way for a company to raise cash, an experienced professional can help it evaluate whether the costs of transaction outweigh the benefits. Limited company, cooperative structure, and trust are three basic forms of a SPV. However, besides the great advantages of various forms of SPV, there are also disadvantages. To cooperative structure, minimum of seven members are required in registration. SPV in the...
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...did the Securitization of Loans Contribute to the Housing Crisis? “Worm or beetle - drought or tempest - on a farmer's land may fall, Each is loaded full o' ruin, but a mortgage beats 'em all” (Will Carleton 1845-1912). A mortgage is the greatest investment the average individual will make in their entire life-time. However, according to today’s standards, the true magic of a mortgage is not when one signs the note and mortgage but what the lender does with it after it has been conveyed. In almost every case after a mortgage is signed, it is almost immediately sold to the secondary market, this is where the loans become securitized. This is where most Americans believe is the root of our current housing crisis. This paper will analyze (1) why most Americans believe that loan securitization is the reason why we are in a housing crisis. (2) How lax screening processes by lenders played a part (3) Risky lending practices and (4) finally, the opposing views on securitization and our current crisis. Why do most Americas believe loan securitization is the problem? In most cases, when we can’t laugh at our mistakes, we have already started looking for someone to blame. In the case of our current mortgage crisis, we have engaged in a myriad of who’s to blame. Some say the lenders failed to properly screen borrowers, while others say the government protected the secondary market as they bought and sold one bad note after another. Most people believe that securitization started in...
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...MEMORANDUM TO: Senior Accounting FROM: Staff Accountant DATE: June 29, 2015 SUBJECT: Shared-Based Payment Reporting and Special Purpose Entities (SPE) CC: Team members ______________________________________________________________________________ As an Accounting Firm it is very important that we follow the most recently changed or amended regulations and standards set by the Financial Accounting Standards Board (FASB). As of 2009 the Financial Accounting Standards Board (FASB) has made amendments to Shared-Based Payment Reporting and Special Purpose Entities. The amendments made were to Statements No. 123 and 95 which covers the Share-Based Payments and Statements No. 123 and 95; the FASB. Also revised, Statements No. 166 and 167 which pertains to Special Purpose Entities (SPE). Share-Based Payment Reporting In the process of an audit, it is important to review the accounting process in terms of how share-based payment is reported to Sensure the entity processes are in line with Generally Accepted Accounting Policies (GAAP). Share-based payment is a complex area to both report on and audit as almost every transaction is unique and referencing IFRS No.2 for the purpose of the audit is not always clearly defined. Defined, share-based payment is an arrangement in which an entity purchases goods or services in exchange for issuance of the entity’s equity instruments or cash payments based on the fair value of those equity instruments. IFRS No.2 has two defined...
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...NPA NORMS: 1. An asset, including a leased asset, becomes non¬ performing when it ceases to generate income for the bank. 2. A non ¬performing asset (NPA) is a loan or an advance where; i. interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan, ii. the account remains ‘out of order’ as indicated at paragraph 2.2 below, in respect of an Overdraft/Cash Credit (OD/CC), iii. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted iv. the installment of principal or interest thereon remains overdue for two crop seasons for short duration crops, v. the installment of principal or interest thereon remains overdue for one crop season for long duration crops, vi. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitization transaction vii. in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. 3. Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. Out of Order: An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding...
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...Is Kenya ripe for securitization of real estate? Defination of securitization Securitisation is the issuance of debt certificates that are secured by cash flows from different kinds of assets. The issued securities are called Asset-Backed Securities (ABS). In essence a pool of payment claims are packaged and are made to securities in order to create a secondary market for the underlying receivables or other various illiquid assets. Securitisation is the financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or collateralized mortgage obligation (CMOs), to various investors. The principal and interest on the debt, underlying the security, is paid back to the various investors regularly. Securities backed by mortgage receivables are called mortgage-backed securities (MBS), while those backed by other types of receivables are asset-backed securities (ABS). Therefore, securitization of real estate is the pooling of real estate assets as underlying assets securing a debt, which is issued to investors in return for cash flows from the underlying real estate assets. The illiquid real estate assets that generate a constant cash flow are formed into a tradable security and are floated on the debt market. Securitization process In its most basic form, the process involves two steps. 1. A company with loans...
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...Securitization in India – Opportunities & Obstacles Sudarshan.B.Rao 1PT10MBA64 INTRODUCTION: Securitization is the process of pooling and packaging Financial Assets, usually Relatively illiquid, into liquid marketable securities. Securitization allows an entity to Assign (i.e. sell) its interest in a pool of financial assets (and the underlying security) to other entities. Securitization in India: While there has been a lot of discussion about the potential of securitization in India, Actual deal activity has not kept pace. While some early adopters like ICICI, TELCO and Citibank have been actively pursuing securitization, almost all the transactions in the market so far have been privately placed with a majority of them being bilateral fully bought out deals. Literature Review: Mr. Manoj Dengla from ICICI Structured Products Group whose valuable insights have been considered for the paper. Mr. Pranay Agrawal and Mr. V. Srikanth of Fractal Technologies Ltd. for narrating their securitization experience. 1. According to reports, the power sector in India needs a funding of about USD 17 billion over the next 10 years 1. 2.A revocable trust (SPV) purchases assets from the Originator and issues Pay Through Certificates to investors. 3. The deal size was Rs. 10.35 billion comprising 11,106 individual housing loans HDFC...
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...identifying the bank’s liquid assets and then expressing this as a percentage of its total assets” (Gup et al., 2007, p.356). It only considers asset liquidity, and this measure is only one point in time. However, dynamic approach compares projected liquidity needs with projected available liquidity (from both asset and liability sources) for each time period. “This approach is superior to focusing on one or the other parts of the liquidity problem because it evaluates liquidity relative to bank needs” (Gup et al., 2007, p.356). APRA is proposing that banks in Australia hold more liquidity in the event of future crisis. The reason for this is “APRA noted that the financial crisis exposed the limitations of existing liquidity reporting rules when markets are under severe stress” (Baltazar, 2009, para.8). APRA (2009) said the financial crisis has highlighted the need for ADIs to have adequate levels of liquidity and robust liquidity risk management systems, and has provided considerable insights into better practice in this area. APRA supports the Basel Committee’s measures and agrees that greater international consistency in prudential regulation, promoted by the Leaders of the G20, will strengthen Australia’s prudential framework. Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming them into a security. It is an important source of liquidity for banks. A typical example of securitization is a mortgage backed...
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...and Accounting Research at UNC-Chapel Hill and the Stanford Graduate School of Business Center for Global Business and the Economy. Electronic copy available at: http://ssrn.com/abstract=1601519 How did Financial Reporting Contribute to the Financial Crisis? Abstract We scrutinize the role financial reporting for fair values, asset securitizations, derivatives, and loan loss provisioning played in the Financial Crisis. Because banks were at the center of the Financial Crisis, we focus our discussion and analysis on the effects of financial reporting by banks. We conclude fair value accounting played little or no role in the Financial Crisis. However, transparency of information associated with asset securitizations and derivatives likely was insufficient for investors to assess properly the values and riskiness of bank assets and liabilities. Although the FASB and IASB have taken laudable steps to improve disclosures relating to asset securitizations, in our view, the approach for accounting for securitizations in the IASB’s Exposure Draft that would require banks to recognize whatever assets and liabilities they have after the securitization is executed better...
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...How did Financial Reporting Contribute to the Financial Crisis? Mary E. Barth & Wayne R. Landsman a a b Graduate School of Business , Stanford University , Stanford, CA, USA b Kenan–Flagler Business School , University of North Carolina at Chapel Hill , Chapel Hill, NC, USA Published online: 07 Jul 2010. To cite this article: Mary E. Barth & Wayne R. Landsman (2010) How did Financial Reporting Contribute to the Financial Crisis?, European Accounting Review, 19:3, 399-423, DOI: 10.1080/09638180.2010.498619 To link to this article: http://dx.doi.org/10.1080/09638180.2010.498619 PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content”) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. Taylor and Francis shall not be liable for any losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the...
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...reporting developments A comprehensive guide Transfers and servicing of financial assets Revised May 2014 To our clients and other friends We are pleased to provide you with the latest edition of our Financial Reporting Developments publication on accounting for transfers and servicing of financial assets. This publication has been updated for further clarification and enhancements to our interpretative guidance. Applying ASC 860 in practice continues to be challenging. ASC 860’s scope is wide and applies to more than just securitizations. Moreover, ASC 860 relies in part on legal interpretations to determine the accounting for the transfer. Additionally, a transferor’s continuing involvement — which can vary significantly from transaction to transaction — will also affect the accounting analysis, requiring a complete understanding of both the business purpose and the form of the transaction. The authoritative literature on accounting for transfers of financial assets continues to change. The FASB is currently finalizing a project that would amend the accounting for repurchase-to-maturity transactions and repurchase financings and require new disclosures for certain transfers accounted for as sales and secured borrowings. In addition, the AICPA is updating its guidance on the use of legal interpretations as evidential matter to support management’s assertion that a transfer of financial assets has met the isolation criterion in ASC 860. This publication includes excerpts from...
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...look to get even better. Upon reviewing of the monthly reporting package and cash flow projections it can be noted that the debt to equity ratio has deteriorated, liquidity is tight, and the company is having difficulty keeping current on taxes and on payments to suppliers and employees. In order to meet UpBeat’s debt covenants the local bank has agreed to purchase $50 million of accounts receivables following provisions included in the sale agreement: UpBeat would like assistance in determining whether the transfer provisions preclude sale accounting. Both transfer provisions have the possibility to preclude sales accounting. Transfer provision 1 may allow for UpBeat to retain the benefit by requiring permission to sell the financial assets. It may be inferred by some that because UpBeat cannot unreasonably withhold the sale the benefit transfers to the bank, however, more information is required to properly known exactly what unreasonably withhold means. Transfer provision 2 has the possibility to allow a sale if the fixed price received for the repurchased receivable is a fair value for the price of the receivables at the time of the sale. The following are examples of the application of effective control principles for sale accounting: ASC 860-10-55-31: Judgment is necessary to determine whether a requirement to obtain the transferor’s permission to sell or exchange should preclude sale accounting. For example, in certain loan participation agreements involving...
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