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De-jargonizer: Understanding key terms in Securitisation structures
– Financial Services Division (finserv@vinodkothari.com)
Introduction
The RBI’s regulatory framework for securitisation, the SSA Directions use several terms used in securitisation structures, some of which are aligned with global practices, while some not. In addition, the marketplace uses some so-very-Desi expressions. As transactions have started coming off the mould, it is important to understand some of the key terms and structural considerations, to help bring more innovation and evolution in the structures.
While we have in the past developed a general securitisation glossary for our readers, the said resource pertains to terms as they are used globally. However, this article aims to demystify key-securitisation related terminologies, specific to the Indian SSA Directions, shedding light on their relevance and practical applications. This pertains to concepts such as securitisation notes (PTCs), credit enhancement (CE), liquidity support, first loss facilities, subordinated tranches, and over-collateralisation are critical in structuring securitisation deals, determining the level of risk borne by different participants, and ensuring compliance with regulatory frameworks like those set forth by the Reserve Bank of India (RBI) and Basel III norms.
Key Components of Securitisation Exposure
- Securitisation Notes (PTCs)
These are the securities issued in a securitisation transaction, representing an interest in the underlying asset pool. They are structured into different tranches based on risk and return characteristics.
- Credit Enhancement (CE)
Credit enhancement is a mechanism designed to improve the credit profile of securitisation notes. CE can be achieved through various means, including:
- Cash collateral
- Subordination
- Excess spread
- Other forms of financial support like guarantees, overcollateralisation, etc.
- Tranches in Securitisation (Tranched Cover)
- Senior Tranche: The highest-rated tranche with the lowest risk exposure.
- Mezzanine Tranche: An intermediate tranche, often referred to in market parlance when there are three tranches. To learn more about Mezzanine tranches, see our explainer, here.
- Junior Tranche: The lowest-rated tranche that absorbs losses first.
Class A, Class B, Class C, Class D etc. : Used when there are more than three tranches.
In respect of computation of risk weights (the table of risk weights as provided under SSA Master Directions) senior tranche actually means the senior most, and the rest of all tranches are said to be junior tranches.
- First Loss Facility
The first loss facility is the first layer of protection against losses in a securitisation transaction. It absorbs losses before any other tranche. However, seemingly it does not include excess spread, as excess spread is not provided by the originator or a third party [Reference drawn to para 5(h) of SSA Master Directions]
- Equity Tranche
Though not explicitly defined, the Basel III Framework [para 712(ii)] describes the equity tranche as the one that absorbs first losses. However, RBI Regulations distinguish between equity tranche and first loss facility. Based on corporate finance principles, the equity tranche is the most junior tranche, with the right to sweep residual returns. As per regulatory provisions, the equity tranche appears to be one level above the first loss facility if such differentiation exists within a structure.
- Over-Collateralisation
Over-collateralisation refers to the excess value of assets transferred over the funding raised by the originator. It can serve as credit enhancement if subordinated but is not counted as part of the first loss facility.
- Underwriting Facility
The underwriting referred to in para 56 of the SSA Master Directions is the same as securities underwriting. In a securities underwriting arrangement, the underwriter is expected to acquire the securities and sell them in the market. The underwriter usually guarantees a certain extent of subscription, in case there is any shortfall, the underwriter takes up the shortfall itself.
Third party or the originator may act as underwriters to the issue of securitisation notes upon coming with specified conditions of this clause in addition to general conditions of clause 45. In case the conditions are not fulfilled, the underwriting facility shall be considered as credit enhancement,
- Liquidity Facility
A liquidity facility is provided with the intention to smoothen the timing difference between the receipt of cash flows from the underlying assets and the payments to be made to the investors. Thus, the same is to support temporary liquidity mismatches/gaps.
Liquidity facility is not credit enhancement. Some notable features are:
- The facility is to meet the temporary cash flow mismatches and not meeting the expenses of the securitisation or losses;
- Funding is to be made available to the SPV and not to the investors;
- Once the liquidity facility is drawn-down, the liquidity facility provider shall have priority of claims over future cash flows and shall be super senior to the claims of the senior investors.
Typically, liquidity facility takes the form of the following:
- Servicer advance: Here the servicer itself extends out of its own pocket to make payments as per the structure and subsequently the same is reimbursed from the collections made from the portfolio. The reimbursement to the servicer in this case becomes the priority as soon as the collections are made;
- Bank facilities: Here a revolving facility is opened with a bank. Drawdowns are made as and when need arises. This is common in case of pay-through structures.
- Cash collateral: This is the most common form of liquidity enhancement, though, India, cash collateral is used as a credit enhancement. Cash collateral is hard collateral to meet periodic delinquencies. Even though having cash collateral is the ideal situation for the investors, however, for the originator cash collateral leads to a negative carry.
9. Interest rate swaps/Currency swaps
In securitization, interest rate swaps (IRS) and currency swaps (CS) play a crucial role in managing interest rate and currency risks, respectively. These financial instruments help align the cash flows of the underlying assets with investor preferences or hedge against market fluctuations.
For instance, in a securitization structure where the underlying pool of loans carries a floating interest rate, but investors prefer fixed-rate returns, an interest rate swap can be employed to convert the floating-rate payments into fixed-rate payments, ensuring alignment with investor expectations. However, it is important to note that interest rate swaps do not serve as credit enhancements, as their purpose is not to cover shortfalls in investor payments but rather to mitigate interest rate risk.
Additionally, since the Special Purpose Vehicle (SPV) legally owns the underlying loan pool, any interest rate swap arrangements must be executed by the SPV to effectively manage interest rate exposure within the securitization structure.
In respect of currency swaps these are particularly useful in cross-border securitization when the underlying asset pool is denominated in one currency, but investors require payments in another. For example: Suppose a SPV securitizes a pool of auto loans in India denominated in Indian Rupees (INR) but attracts global investors who prefer to receive payments in U.S. Dollars (USD). Since the cash inflows are in INR but the SPV needs to make payments to investors in USD, it is exposed to foreign exchange risk. To mitigate this, the SPV enters a currency swap agreement with a bank or financial institution. Under this agreement, the SPV exchanges INR denominated cash flows for USD at a predetermined exchange rate.
- Tranched cover
For definition of tranched cover reference may be drawn to Basel: CRE 22, which defines “tranched cover” under para CRE 22.93 as: tranched cover is a mechanism of transfer of an exposure in one or more tranches to a protection seller or sellers. Further as per the definition of “tranched cover”some level of risk of the loan pool is required to be retained by the originator; and the risk transferred and the risk retained are of different seniority. Further as per the definition, tranched cover can only be provided for the senior tranches (eg second loss portion) or the junior tranche (eg first loss portion). Usually tranched covers are provided in the form of a guarantee issued by the protection seller or providing cash collateral by such a seller.
The graphic below shows the overall universe of securitisation exposure.
Figure: Summarizing the meaning of securitisation exposures
Other Resources
We have over the years developed several other resources on securitisation. Should the reader wish to understand this area better, reference may be had to below comprehensive resources
- Write-Ups and Reports
- Securitisation Primer (For a primer on the basic principles underlying securitisation.)
- Indian Securitisation Report, 2019 (For a holistic introduction to securitisation in India, the motivation for parties in a securitisation transaction, and regulatory framework for securitisation in India)
- Vikas Path: The securitised path to Financial Inclusion (2024) (For curated resources on securitisation and co-lending, including: securitisation mechanics, accounting, tax aspects, compliance, etc.)
- Taxation in Securitisation: A judicial overview
- Securitisation of MSME receivables in India
- Our securitisation resource centre: For other write-ups and material in this space
- Youtube Videos
- Regulatory representations and Advocacy
Secure with Securitisation: Global Volumes Expected to Rise in 2025
-Dayita Kanodia (finserv@vinodkothari.com)
Despite global macroeconomic challenges, including persistent inflation, securitization volumes and ratings across most structured finance asset classes demonstrated remarkable stability in FY 2024. Strong housing markets bolstered credit performance in sectors like U.S. and Australian RMBS, while European housing markets faced concerns of overvaluation.
Overall, the performance of the securitisation market in FY 2024 was considered to be stable with a few exceptions of leveraged lending and collateralized loan obligations (CLOs) which remained in focus for numerous reasons, including their elevated exposures to lower-rated obligors.1
This article delves into the securitization trends observed in FY 2025, analyzing the market’s performance and offering insights into future projections.
Global Securitisation Volumes for FY 2025
US
As of December 2024, the total US Structured Finance issuance reached USD 770 Billion. In this, the total RMBS issuance accounted for USD 137.9 Billion (17.9% of the total structured finance issuance). It may be noted that total RMBS issuance for FY 2023 amounted to USD 78 Billion, therefore leading to an increase of roughly 76% in the current fiscal year. Securitisation of Credit Card receivables accounted for about USD 20.6 Billion while auto loans accounted for USD 126.4 Billion.2
As per S&P Global, the total credit card ABS issuance will be about $33 billion in 2025 thus leading to a 60% increase from the previous year. It also estimates the total RMBS issuance to reach USD 160 Billion supported by home price appreciation and low unemployment rates.
The below chart shows structured finance issuances by sub-sector:
Traditionally, US data has excluded agency-backed transactions (the data above, therefore, would mostly be non-qualifying residential mortgage loans). SIFMA data shows that agency and non-agency RMBS issuance added to USD 1.592 trillion, registering an increase of 21%. This includes an increase of 119% in non-agency RMBS, and about 19% in agency-RMBS.
Yet another segment which is typically boosted by the benign credit conditions is CMBS. US CMBS volumes touched USD 103 billion [S&P data]. This is over 2.5 X of the volume seen last year.
European Market
European securitisation issuance in 2024 reached USD 142 billion, reflecting an over 50% increase compared to 2023.While fewer outstanding transactions in the European securitisation market are anticipated to hit their call dates in 2025, typically a factor that negatively impacts volumes; improvements in underlying credit originations offer a positive outlook3.
A highlight of 2024 was the record-setting bank-originated securitisations, which soared to a 12-year high of over USD 36 billion. Additionally, sustainable-labelled securitisation rebounded strongly, with issuances exceeding USD 5 billion during the year. RMBS volumes in Europe rose by approximately 60% to USD 46 billion, a trend likely to persist into 2025.
The below chart shows the RMBS and ABS issuance over last 3 years in the European market:
China
In China, new securitization issuances grew by 4.8% year-on-year to USD 200 billion during 1Q-3Q 2024. Issuances of consumer loan ABS and account receivables ABS saw noticeable growth and MSE loan ABS issuances surged by 76%. However, the issuance of certain major asset classes, such as auto loan ABS declined significantly (Auto loan ABS issuance fell 39% in 1Q-3Q 2024 to USD 11.83 billion. The number of transactions issued during the period dropped to 22 from 29 a year earlier).4
Consultation on Securitisation
A highpoint of the EU securitisation market in 2024 is the consultation by the European Commission to mend the regulatory framework for securitisation. This exercise was prompted by several positive noises about securitisation at a policy-makers’ level. Enrico Letta, former Italian Prime Minister, in his report to the EU, made a strong case for securitisation. He said: “Securitization acts as a unique link between credit and capital markets. In this sense, the securitization market offers significant potential. Increasing its utilization brings two key benefits: i) broadening and diversifying the pool of assets available for investment, and ii) unlocking banks’ balance sheet capacity to facilitate additional financing. Moreover, the adoption of green securitization, whether through securitizing green assets or directing securitization proceeds towards green financing, holds promise as a significant contributor to the transition towards sustainability. Therefore, we advocate for reforms in the European securitization framework to enhance its accessibility and effectiveness”5 In addition, comments by Noyer and those by Mario Draghi favoured changes in securitisation framework. Thus, in October, 2024, the Eurpean Commission began a targeted consultation on several aspects of securitisation market. The responses from the consultation are currently available on the Commission’s website.
Surge in CLO market
One of the notable developments in 2024 was the surge in CLO volumes. US CDO/CLO issuance, as per SIFMA statistics, recorded an issuance volume of USD 85 billion, which is 195% higher than the issuance last year. European CLO volume registered a volume of Euro 46 billion, substantially higher than last year. One report, citing a BofA research, states that the global outstanding CLO volume reached nearly USD 1.2 trillion.
The growth in the CLO market is a direct result of the activity in the leveraged loan market, as the feedstock of CLOs primarily is leveraged loans. Leveraged loans, a term that is rather understood than defined, is mostly low-rated loans to entities that are already carrying significant leverage. The US leveraged loan market adds to upwards of USD 1.2 trillion, and that in Europe stood at about Euro 280 billion. Most of these leveraged loans tend to “syndicated” or downsold in pieces to various participating banks – which may number from a dozen to even 200, and hence, reflecting the extent of lender participation, this market is called “broadly syndicated loan” or BSL market.
While private credit financiers are increasingly making inroads into the space, a lot of capital in the leveraged loan market comes from CLOs.
Another interesting development in the US CLO market has been the growth of CLO ETFs. A report by S&P says that CLO ETFs’ AUM rose from USD 120 million in 2020 to USD 19 billion in Nov., 2024.
Regulatory updates
UK enacted the Securitisation Regulations, 2024, which replaced the earlier 2017 Regulations. Pursuant to the Regulations, the Financial Conduct Authority has framed the set of rules called Securitisation Sourcebook. The rules lay particular emphasis on the Simple, transparent and standardised (STS criteria) of securitisation transactions, and by way of amendments made later in the year, bar the domiciling of SPVs in certain high risk jurisdictions.
Growth in synthetic securitisation
Synthetic securitisation, also sometimes known as synthetic risk transfer or significant risk transfer (SRT) transactions, were mostly limited to Europe and SE Asia jurisdictions, due to lack of clarity on regulatory capital treatment in the USA. In Sept., 2023, the Federal Reserve board clarified that capital relief will be applicable in case of synthetic transactions. Since the clarification, US share in global synthetic securitisations grew to over 30%, from a small fraction earlier. The IMF Global Financial Stability Report of October, 2024 states that globally, more than $1.1 trillion in assets have been synthetically securitized since 2016, of which almost two-thirds were in Europe.
The said IMF report highlights several risks of SRT transactions. First of all, it states, basis anecdotal evidence, that banks are providing funding to credit funds for buying tranches of SRT deals of other banks, thereby implying that the risks are eventually within the banking system. It also states that SRTs may “mask banks’ degree of resilience because they may increase a bank’s regulatory capital ratio while its overall capital level remains unchanged.” Furthermore, overreliance on SRTs exposes banks to business challenges should liquidity from the SRT market dry up. Financial innovation may lead to securitization of riskier asset pools, challenging banks with less sophisticated tools for risk management, because some more complex products make the identity of the ultimate risk holder less clear. Finally, although lower capital charges at a bank level are reasonable, given the risk transfer, cross-sector regulatory arbitrage may reduce capital buffers in the broad financial system while overall risks remain largely unchanged.
Sustainable-labelled Securitisation
The European market saw an issuance exceeding USD 5 Billion during 2024 with first time issuances in solar ABS sectors.
In the U.S., government-sponsored enterprises are purchasing mortgage pools targeting low-carbon buildings and refinancing these assets in the mortgage-backed securities market to finance energy and water efficiency programmes6. For instance, in September 2024, Fannie Mae a GSE came up with a single family green bond framework. Under this framework, loans which conform to the eligibility requirements are acquired from lenders and are securitised into Fannie Mae MBS which are either delivered to the lenders or sold to investors. Here, only projects achieving certain environmental performance standards such as Solar Loans and water efficiency loans are eligible7
Indian Securitisation Market8
Securitisation volumes surged about 27% on-year to Rs 1.78 lakh crore in the first nine months of FY 24-25, supported by large issuances from private sector banks. In the third quarter alone, issuances touched Rs 63,000 crore with private sector banks contributing to 28% of this (HDFC bank alone securitised new car loans by issuing PTCs valued at just over Rs 12,700 crore). However, originations by NBFCs were only up by 5%. The market also saw 15 first time NBFC issuers, bringing the total number of originators to 152, compared with 136 in the last financial year.
Among asset classes, vehicle loans (including commercial vehicles and two-wheelers) accounted for 48% of securitisation volume (vs 40% in the corresponding period last fiscal).
Mortgage-backed loans accounted for about 23% of securitisation volume (vs 20% in the corresponding period last fiscal).
Overall, the Indian Securitisation Market volume is expected to reach Rs 2.4 trillion by the end of FY2025.
On the regulatory front, SEBI, in its board meeting dated December 18, 2024, approved amendments to the framework for the issuance and listing of Securitised Debt Instruments (SDIs). These amendments aim to expand the SDI market and align the regulations with the current securitisation norms prescribed for RBI-regulated entities.
This growth trajectory is expected to persist into FY26, fueled by strong securitization volumes and the expanding involvement of private sector banks. With evolving market dynamics and growing investor confidence, the securitization market is poised for sustained momentum for years to come.
- India securitisation volumes 2024: Has co-lending taken the sheen?
- Indian securitisation enters a new phase: Banks originate with a bang
- Securitisation: Indian market grows amidst global volume contraction
- https://www.spglobal.com/_assets/documents/ratings/research/101591938.pdf
↩︎ - https://www.spglobal.com/_assets/documents/ratings/research/101610419.pdf
↩︎ - https://www.spglobal.com/ratings/en/research/pdf-articles/easset_upload_file78691_3234527_e.pdf
↩︎ - https://www.spglobal.com/_assets/documents/ratings/research/101607929.pdf
↩︎ - https://www.consilium.europa.eu/media/ny3j24sm/much-more-than-a-market-report-by-enrico-letta.pdf
↩︎ - https://www.spglobal.com/_assets/documents/ratings/research/101604403.pdf ↩︎
- https://capitalmarkets.fanniemae.com/media/20626/display
↩︎ - Source – https://www.crisilratings.com/en/home/newsroom/press-releases/2025/01/securitisation-volume-up-27percent-in-nine-months-of-this-fiscal.html
↩︎
Full Day Workshop on Securitisation,Transfer of Loans and Co-lending
Seats Full, Registration Closed.
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Register here for the Repeat Workshop: https://forms.gle/TGQBkVXgzX8Ho5ts8
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Our resources on new Securitisation and Transfer of Loan Directions
- Lecture on basics of Securitisation available on YouTube
- Securitisation Primer
- Evolution of securitisation – Genesis of MBS
- Global Securitisation Markets in 2021: A Robust Year for Structured Finance
- Securitisation Glossary
- After 15 years: New Securitisation regulatory framework takes effect
- One stop RBI norms on transfer of loan exposures
- Loan Participations: The Rising Star of Loan Markets
- FAQs on Securitisation of Standard Assets
- FAQs on Transfer of Loan Exposure
- Legal Issues in Securitization
- Has the cover fallen off Covered Bonds?
- Security Token Offerings & their Application to Structured Finance
- Resurgence of synthetic securitisations: Capital-relief driven transactions scale new peaks
- Understanding the budding concept of green securitization
Full Day Workshop on Securitisation,Transfer of Loans and Co-lending
Register here:
https://forms.gle/kbjwwAmayAWKJwZr5
Our resources on new Securitisation and Transfer of Loan Directions
- Lecture on basics of Securitisation available on YouTube
- Securitisation Primer
- Evolution of securitisation – Genesis of MBS
- Global Securitisation Markets in 2021: A Robust Year for Structured Finance
- Securitisation Glossary
- After 15 years: New Securitisation regulatory framework takes effect
- One stop RBI norms on transfer of loan exposures
- Loan Participations: The Rising Star of Loan Markets
- FAQs on Securitisation of Standard Assets
- FAQs on Transfer of Loan Exposure
- Legal Issues in Securitization
- Has the cover fallen off Covered Bonds?
- Security Token Offerings & their Application to Structured Finance
- Resurgence of synthetic securitisations: Capital-relief driven transactions scale new peaks
- Understanding the budding concept of green securitization
Simple, Transparent and Comparable (STC) securitisation: Discrepancy in risk weights needing urgent remedy
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Our resources on Securitisation:
Indian securitisation enters a new phase: Banks originate with a bang
Abhirup Ghosh | abhirup@vinodkothari.com
The Indian securitisation market has been without banks as originators for nearly 17 years, until HDFC Bank[1] launched a landmark transaction that may signal their potential return. Prior to the Global Financial Crisis, which raised significant questions about the viability of securitization as a financial product, banks like ICICI Bank were actively involved in the market, with ICICI’s last reported transaction occurring in 2007[2].
It is notable that erstwhile HDFC Limited, prior to its merger into the Bank, was the largest single originator of home loan securitisations; however, the present transaction is not home loans.
After the GFC, banks shifted from being originators to becoming investors in securitised assets. To meet the priority sector lending targets, banks started investing heavily in the securitisation market, be it in pass-through certificates or through acquisition of loan pools. This was a stark contrast to the situation elsewhere in the world, where the issuances are primarily made by banks.
Read more →Representation for Regulatory Amendments to Promote Securitisation in India
Team Finserv | finserv@vinodkothari.com
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