Securitization of Standard Assets and it’s Computation

Computation of Securitization of Standard Assets:

The securitization process involves various steps, including the selection of assets, structuring of the transaction, and issuance of securities.

  • Selection of Assets: The originating entity selects a pool of standard assets that meet certain criteria for securitization. Standard assets are those that are performing, and the borrowers are making regular interest and principal payments on time.
  • Pooling of Assets: The selected standard assets are pooled together to create a pool of loans or receivables. The pool should have sufficient diversification to spread the risk effectively.
  • Special Purpose Vehicle (SPV): A special purpose vehicle (SPV) is created to hold the pool of assets and issue the securities. The SPV is a separate legal entity with no other activities than holding and managing the securitized assets.
  • Structuring: The structure of the securitization transaction is determined, including the type of securities to be issued, the priority of cash flows, and the credit enhancements (if any) to protect investors from potential losses.
  • Tranching: The pool of assets is divided into different tranches based on their risk profiles. Each tranche represents a different level of risk and return for investors. Tranches may include senior, mezzanine, and equity tranches.
  • Credit Enhancements: Credit enhancements may be incorporated to enhance the credit quality of the securities. Common credit enhancements include overcollateralization, subordination of tranches, and reserve funds.
  • Rating: The securities issued by the SPV are assigned credit ratings by rating agencies based on the credit quality of the underlying assets and the structure of the transaction.
  • Issuance and Sale: The securities are then issued by the SPV and sold to investors in the capital markets. The proceeds from the sale are used to pay off the originating entity and fund the purchase of the assets.
  • Cash Flows: The cash flows from the underlying assets, such as loan repayments and interest, are collected by the SPV and passed on to the investors according to the terms of the securities.
  • Servicing: The servicing of the securitized assets, including loan collection and borrower communication, may be retained by the originating entity or outsourced to a third-party servicer.

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