RATING OF STRUCTURED OBLIGATIONS/ASSET SECURITISATION :

Structured borrowing arrangements are entered into by companies for various reasons. However, the most important one is that less credit worthy instruments or corporates are able to tap sources of funds at a more advantageous borrowing rate by offering a variety of credit enhancements.

The process of converting loans or receivables into negotiable instruments is known as securitization. These negotiable instruments are then sold to investors’; they are secured by the underlying assets and have other credit enhancements. Securitization transforms illiquid assets like the renewable portfolio on the balance sheet of a lender into a marketable security.

The principal credit risk in asset backed financing is potential impairment of cash flows due to the assets becoming defaulting on repayments or turning into a loss. The main factors considered for credit rating are the overall risk profile and monitoring and collection procedures of the issuer; the quality of the assets being securitized; the process of selection of the asset pool to be securitized; the characteristics of the pool and the cash flows from it based on the past record of its behaviour. The possible credit loss and other deficiencies of the pool in terms of timing and quantum of cash flows are analyzed and the extent and nature of credit enhancement is then determined.

Other important considerations in a securitization transaction are the legal and tax structure and the ability and willingness of the services and trustee to manage and maintain control on assets and payment streams from them.