Risk Framework for Securitisation Transactions

8/13/2019 Risk Framework for Securitisation Transactions

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CRISILLimited

CRISILs analytical framework for evaluatingSecuritisation Transactions


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CRISILLimited

I. Securitisation - Concept

Packaging and conversion of illiquid assets andcash flows into tradable securities


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Typical transaction structure

Sale/Assignmentof pool receivables

SPV TrustConsideration

Consideration

InvestorsPTCs

Borrowers

Originator/seller

Loan

Scheduledpayments

Trust andRetentionAccount

Deposit of collections

Servicingagent

Trustee


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Borrower to Investor flow of money

BorrowerSeller/Ser vicingagent

Trust andretentionaccount

Investor

CreditEnhancement

Servicing &commingling

Trustee &designated bank

Legal risk, market risks

Credit


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CRISILs analytical framework

Macro economic

Prepayment Interest Rate

Originator

Asset

Portfolio

Pool

True Sale

Bankruptcyremoteness

Servicer

Commingling

Swap counterparty

Miscellaneous


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Originator risk assessment

Origination Systems

Credit Appraisal andunderwriting

Disbursement and postdisbursal documentation

Collection and recoverymechanism

Management

Information

Systems

(MIS)

Risk

Control

Mechanism


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Asset risk continuum matrix

CRISILs risk continuum matrix form a critical part of theanalysis

Around 90% of PTC issuances arebacked by these assets

The relative position of the asset class on the matrix

is factored into base case loss levels


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Portfolio Analysis

CRISIL analyses the portfolio in terms of theoriginators

Length of experienceBook SizeCollection performance trendsPortfolio aging analysis

DelinquenciesPrepayment trends


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Pool level due diligence

Pool selection criteria Maximum LTV Minimum seasoning

Restriction on overdue contracts Geographical diversityChecked for logical and mathematical inconsistenciesBorrower concentration and profile controlledNegative deviation from portfolio profile penalised

Pool information verified through independent auditor in 100% ofcases


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Macro-economic risks

The performance of underlying loan contracts alsodepends on macro-economic factors like

Industry downturns Adverse price movements of underlying assets

CRISIL s t resses the poo l fo r su ch m acro-econom ic fac tor s


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CRISIL analyses theportfolio and staticpools for monthlyprepayment rates

CRISILs analysis of prepayment risk Prepayments are reality in retail asset business. Theprepayments are passed on to the investors, exposing thetransaction to following risks:

Risk descr ip t ion Assessmen tmechan ism

Mit igat ion Techniq ue

Reinvestment risk due to reduction ofaverage maturity of

the instrumentPrepayment loss due to difference inprincipal of theinvestor and pool

Separate class ofPTCs carved out toabsorb all

prepaymentsCredit enhancementis sized to take careof prepaymentlosses


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Interest rate risk

Risk descriptionBasis risk arises in the securitisation transactions when the

assets are paying interest on fixed rate and the liabilitiesare to be paid out on floating rates or vice-versa

Ass essment mech anism Mit igat ion Techniq ue

CRISIL subjects pools to varyingassumptions on patterns of interest ratesover the tenor of the transaction

Patterns determined throughdiscussions with in-house economicresearch arm

Simulation techniques determine theworst-case scenario

CRISIL stipulates an interest rateswap provided by a designated swapprovider.

Alternatively, CRISIL sizes creditenhancement to factor in this risk


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Legal due diligence processes

Transaction specific legal opinion obtained from eminent legalcounsels (on EVERY transaction)

In addition, dedicated in-house legal team to analyse legal issues

Legal opinion addresses the following key legal issues: Assignment of receivables is valid

Transfer of receivables to the trust constitutes a true sale

Cash collateral is bankruptcy remote from originator

Documentation has been executed in accordance with stampduty and registration laws

Transaction specific issues


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CRISILs criteria states that theservicer should have a minimum

short-term credit rating of P1 However, if the rating is below P1,

the quantum of credit enhancement isadjusted so as to adequately coverthe risk

Commingling criteria

This risk arises on account of the time lag between poolcollections and investor payouts, during which the servicercontinues to hold the pool collections. In this interim period, collections from the securitised loans

may mingle with other funds of the servicer.Ass essment mech anism Mit igat ion Techniq ue

The quantum of funds commingled isestimated, considering the time period for

which the funds are retained by theoriginator before passing on to theinvestors


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Swap counterparty criteria

The swap is incorporated in the structure to mitigate the basisrisk. However, The counterparty risk arises with regard to thecreditworthiness of the swap provider.

CRISIL mitigates the swap counterparty risk through thefollowing criteria:

For swap having maturity of up to 1 year SWAP counterparty shouldhave a rating of P1+

For swap having maturity of more than one year but up to 5 years,SWAP counterparty should have a minimum rating of AA-

For swap having maturity of over 5 years SWAP counterparty shouldhave a rating of AAA


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CRISILs criteria on miscellaneous counterparties Cash collateral bank risk: arises with regard to the liquidity of theinstrument and creditworthiness of the designated bank.

CRISIL mitigates this risk through the following criteria:

For a AAA(so)' rating, CC should be permitted to be invested ininstrument with maturity over a year provided the entity israted at least P1+ and AA - instrument with maturity up to a year provided the entity israted at least P1+

providedInvested instrument can be put at par at any timeUpon the downgrade of the invested instrument, it should beliquidated and reinvested in permissible instruments within 30days


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CRISILLimited

CRISILs surveillance process and performance ofCRISIL rated securitised pool


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CRISILs surveillance processes

CRISIL presently reviews 87 ABS and 22 MBS pools

Specialized surveillance team of three analysts

Servicer report received from servicer or trustee every month

Performance analysis of all pools undertaken every monthDiscussion with originators on trends emerging out of theperformance analysis

Detailed review of the transaction in case of deviations fromCRISILs estimates

Reset of credit enhancement based on pools performance

Quarterly pool performance metrics published and disseminatedby CRISIL


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Performance of CRISIL rated pools

No downgrade till date

No default till date

Strong and stable performance of pools Low utilisation of credit enhancement


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MBS pool performance.. continued

Threshold collection ratio(TCR): TCR represents theminimum collection ratio(monthly collections/monthlybillings) required to be able toservice the PTC payouts.

TCR distribution (No. of pools)

8

4

4

0-75% 75%-85% 85%-90%

Credit loss coverage distribution (no. ofpools)

1

3

3

3

6

3-5 5-10 10-20 20-50 > 50

Credit coverage: Ratio of

maximum sustainable credit lossin a transaction (1-TCR) to thepresent credit loss in the pool


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MBS pool performance.. continued

Threshold interest rate (TIR): TIRrepresents the minimum level thatthe pool yield can go down to andstill be able to service the PTC

payouts on time

Threshold prepayment rate (TPR):

TPR represents the effective levelof premium coverage provided bythe credit enhancement

Threshold Interest rate distribution (No.of pools)

12

2

3

0-3% 3%-4% 4%-6%

Prepayment risks are mainlyrelevant in premium structureswhere the prepayments lead toan erosion of creditenhancement. All the CRISILrated pools have a TPR ratio of

more than 100 per cent


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Credit Enhancement Utilisation in ABS pools

CRISIL has analysed credit enhancement utilisation in 54 poolswhich have seasoned for more than 12 months post securitisation

Max credit enhancement utlisation (no ofpools)

29

4

5

8

6 2

50%

Average Credit Enhancement Utilisation (no.of pools)

31

7

11

4 2

40 %

Majority of the pools are showing


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ABS pool performance

As part of surveillance activity, CRISIL further studies two indicators Threshold credit loss (TCL) and credit coverage ratio (CREDCOV) onan on-going basis

Threshold credit loss (TCL = 1 threshold collection ratio ) representscredit loss threshold of the transactionbeyond which the investors could face ashortfall in their payouts

Credit coverage ratio (CREDCOV): Ratioof maximum sustainable credit loss in atransaction (1-TCR) to the present creditloss in the pool

CREDCOV (No of pools)0 5

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20

33

< 3 3-5 5-10 10-20 > 20

Threshold Coverage Ratio (No. of pools)19

30

20

16


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Risk Framework for Securitisation Transactions

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