Question

1. What do you mean by Securitization? Explain
   1. A         Types of Securitization
   2. B         Which was the first non-assets, backed Securitization deal in Saudi Arabia?

Answer 1

The process of securitization typically involves the creation of pool of assets from the illiquid financial assets, such as receivables or loans which are marketable.

In other words, it is the process of repackaging or rebundling of illiquid assets into marketable securities.

It is a method of recycling of funds.

A. Types of Securitization:

1. Securitization with recourse:

“With recourse” is a legal term and relates to the credit risk retention by the originator. It essentially means that the assets are sold to the investors through special purpose vehicle(SPV) with the clause that if any party in the portfolio of assets defaults, it would be protected by the originator that is the originator would make the default good.

2.Securitization without Recourse:

1. In case of Securitization without recourse, whole risk in the assets portfolio is transferred to the investors through the SPV that is originator is in no way concerned with the assets once that if sold to the SPV. This is the true form of Securitization.

2. In this case, simply the asset would get converted into cash for the originator with no future obligation. So this transaction performing two functions, one the financing and another the credit risk transfer to the investors from the originator.

3. The issuer is under an obligation to pay to the investors only if the cash flows are received by him from the collateral.

4. The risk run by the investor can be further reduced by obtaining insurance cover, often provided by a insurance policy.