Define concept of Debt securitisation in financial management.

Securitization is the procedure of converting assets into securities. In other words, securitization means all assets of a company are consolidated into securities.

An originator, special purpose vehicle (SPV), investment bank, credit rating agency, insurance company, obligator and investor are required in securitization.

The process involved in debt securitisation is as follows −

  • Identification.
  • Transfer.
  • Issue.
  • Redemption.
  • Credit rating.
  • Amount is collected into pool.
  • Divide amount into small parts and sell that small parts as securities.
  • Buyers who buy these securities will get interest.
  • Mortgage backed securities.

Moreover, process continues as a cycle

Securitization is done on

  • Term loans.
  • Receivables (government & companies).
  • Purchases loans.
  • Lease finance.
  • Mortgage loans etc.

Methods in debt securitisation are mentioned below −

  • Pass through and pay through certificates.
  • Preferred stock certificates.
  • Asset based commercial paper.

Advantages of debt securitisation are −

  • Act as source of fund (additional).
  • Boots for liquidity.
  • Rate of return is high.
  • Diversification of portfolio.
  • More profitable.

Disadvantages of debt securitisation are −

  • High risk is involved.
  • Complex financial structure.