SECURITIZATION PROCESS, What is Securitization?? How securitization is done??

Summary

The script delves into the concept of securitization, illustrating the process of converting illiquid assets into liquid assets. It uses an example of a company, 'Example Limited', which has taken loans and distributed the funds among people, resulting in a depleted balance sheet. The company then securitizes its assets to raise funds from the market, leveraging financial engineering to transform and sell the assets, ultimately restoring its liquidity. The explanation simplifies the complex financial process, making it accessible and engaging for viewers.

Takeaways

• 📚 Security involves converting illiquid assets into liquid assets, which can be easily traded or sold.
• 🏦 The example given is about a finance company or bank that lends money and has a security interest in the assets of the borrower.
• 💼 The term 'security interest' refers to the lender's right to take possession of the collateral if the borrower fails to repay the loan.
• 🔢 The script mentions specific figures like '2 crore' and '4 crore' to illustrate the financial transactions and the total amount involved.
• 💡 The concept of 'securitization' is introduced as a process to raise funds by converting assets into securities that can be sold in the market.
• 🏢 The example of 'Next Limited' is used to explain how a company might deal with financial difficulties by raising funds through securitization.
• 📉 The script discusses the impact on a company's balance sheet when loans are given out and how it can affect equity and liabilities.
• 🤔 It raises the question of how a finance company would act when faced with the need for new customers and the potential for a damaged reputation.
• 🏦 The process of securitization is explained as a way to obtain funds from the market to provide to customers, using the company's assets as collateral.
• 🔄 The script mentions the creation of special purpose vehicles (SPVs) to facilitate the securitization process and isolate the risk.
• 📈 The final takeaway is about the transformation of assets into securities through financial engineering, which is central to the securitization process.

Q & A

What is the basic definition of securitization?

Securitization is the process of converting illiquid assets into liquid assets, typically by pooling them and issuing securities that investors can buy.

What is an example of an illiquid asset?

An example of an illiquid asset mentioned in the script is loans that a finance company or bank has given out to customers.

Why might a finance company need to securitize its assets?

A finance company might need to securitize its assets to raise funds, especially if it has run out of money and needs to attract new customers or pay off existing debts.

What is a Special Purpose Vehicle (SPV) in the context of securitization?

A Special Purpose Vehicle (SPV) is a separate legal entity created to isolate the risk of the securitized assets from the original company. It holds the assets and issues securities to investors.

How does a finance company use an SPV to securitize its assets?

The finance company transfers the illiquid assets to the SPV, which then issues securities backed by these assets to investors, providing the finance company with the funds it needs.

What is the role of the SPV in the securitization process?

The SPV's role is to hold the securitized assets, issue securities to investors, and manage the cash flow from the assets to pay the investors.

What is the significance of collateral in the securitization process?

Collateral is the underlying assets that back the securities issued by the SPV. It is crucial as it provides assurance to investors about the value and security of their investment.

How does the securitization process help a company with a bad balance sheet?

Securitization can improve a company's balance sheet by moving the illiquid assets off its books, thus showing a cleaner balance sheet with less debt and more equity.

What are the potential risks for investors in a securitization deal?

Potential risks for investors include the credit risk of the underlying assets, the risk of the SPV's bankruptcy, and the risk of the underlying collateral losing value.

What happens to the original company after the assets are securitized?

After securitization, the original company can focus on its core business without the burden of illiquid assets, and it can use the funds raised to grow or pay off debts.

How does the securitization process affect the customers of the original company?

The customers are generally unaffected by the securitization process, as their loans or assets have been transferred to the SPV, which will manage them independently of the original company.