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

WISDOM SIMPLIFIED

29 Sept 202105:15

Summary

TLDRThe 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.

Outlines

00:00

💼 Understanding Securitization

This paragraph discusses the concept of securitization, which is the process of converting illiquid assets into liquid assets. It uses an example involving a company called 'Next Limited' that has taken a loan and distributed the funds among people. The company is now facing a shortage of funds and needs to secure more to continue its operations. The paragraph explains how securitization can help a company like Next Limited to raise funds from the market by converting its illiquid assets into liquid ones. It also touches upon the role of financial engineering in transforming assets and the creation of special purpose vehicles (SPVs) to facilitate the process.

05:00

🎬 Very Mach for Watching

This paragraph seems to be a placeholder or a filler with no substantial content provided. It contains a phrase that might be a typo or a non-English expression, making it difficult to provide a detailed summary. It appears to be out of context with the rest of the script, and without further information, it's challenging to determine its relevance to the overall topic of securitization.

Mindmap

Keywords

💡Securitization

Securitization is the process of converting illiquid assets into liquid assets, typically through the issuance of securities. In the video's context, it refers to the financial mechanism that allows a company to raise funds by transforming its assets into securities that can be traded on the market. The script mentions 'securitization' as a way for a company to access funds from the market to pay its customers, illustrating the concept with the example of a company named 'Example Limited' that uses securitization to manage its financial obligations.

💡Liquid Assets

Liquid assets are assets that can be quickly converted into cash without significant loss of value. The video discusses the conversion of assets into liquid form, which is essential for a company's ability to meet its financial needs promptly. The script uses the term in the context of explaining the securitization process, where assets such as receivables are turned into liquid assets that can be easily traded or sold.

💡Finance Company

A finance company is a non-bank financial institution that provides various financial services, typically including lending. In the script, the finance company is portrayed as an entity that lends money and is involved in the securitization process, providing loans to customers and managing the funds it receives from the market.

💡Loan

A loan is a sum of money that is borrowed and expected to be paid back with interest. The video script discusses loans extensively, particularly how a company like 'Example Limited' uses loans to finance its operations and how securitization can be used to manage and repay these loans.

💡Balance Sheet

A balance sheet is a financial statement that provides a snapshot of a company's financial condition, including its assets, liabilities, and equity. The script refers to the balance sheet to illustrate the financial health of a company, showing how securitization can impact the balance sheet by changing the appearance of loans and equity.

💡Equity

Equity refers to the ownership interest in a company, representing the residual interest in the assets of the company after deducting liabilities. In the video, equity is mentioned in relation to the balance sheet, indicating how the process of securitization can affect the perceived value of a company's equity.

💡Special Purpose Vehicle (SPV)

A Special Purpose Vehicle is a separate legal entity created to isolate financial risk. In the context of the video, an SPV is used in the securitization process to hold the assets that are being securitized, thereby protecting these assets from the original company's creditors. The script describes the creation of an SPV to facilitate the securitization process and manage the assets involved.

💡Collateral

Collateral is an asset or property that a borrower offers to a lender as a form of security for a loan. The video script discusses collateral in the context of loans, explaining how assets are used as collateral and how they can be securitized to raise funds.

💡Asset-Backed Securities (ABS)

Asset-Backed Securities are financial securities backed by a pool of assets, such as loans or receivables. The script touches on the creation of ABS through the securitization process, where the company's assets are bundled and sold as securities to investors.

💡Market

In the context of the video, the market refers to the financial marketplace where securities are traded. The script discusses how a company can access the market to raise funds through securitization, highlighting the importance of market participation in the process.

💡Customer

A customer is a person or entity that purchases goods or services from a company. The video script mentions customers in the context of a company's obligations to pay them, and how securitization can be a means to generate the necessary funds to fulfill these obligations.

Highlights

Securitization is the process of converting illiquid assets into liquid assets.

It involves financial engineering to transform assets and manage risk.

The example of a finance company or bank that lends money is used to explain securitization.

A detailed explanation of how a company's balance sheet might look with securitization.

The concept of asset-backed securities and their role in the securitization process.

How securitization can help a company raise funds from the market to pay customers.

The importance of collateral in the securitization process.

The creation of special purpose vehicles (SPVs) in securitization.

The process of transferring assets to an SPV to facilitate securitization.

The role of investors in the securitization process and the attraction of asset-backed securities.

The potential impact of securitization on a company's balance sheet and equity.

How securitization can improve a company's liquidity and financial flexibility.

The risks associated with securitization and the need for proper management.

The legal and regulatory framework surrounding securitization.

The use of securitization in managing non-performing assets.

The innovative methods of securitization in the modern financial market.

The future of securitization and its potential applications in various industries.

The ethical considerations and responsible practices in securitization.

The educational value of understanding securitization for finance professionals.