Securitization is the procedure where an issuer designs a marketable financial instrument by merging or pooling various financial assets into one group. The issuer then sells this group of repackaged assets to investors. Securitization is useful because it offers opportunities for investors and frees up capital for originators, both of which promote liquidity in the marketplace. Securitization is an exceptionally clever process that has very significant benefits for practically everyone involved. It takes debt off a balance sheet and replaces it with liquidity. It provides third-party investors with clearly rated investments that pay according to the risk that they are willing to shoulder. The investor looks at the entity’s cash flow and not the entity itself; hence, it’s also called assets backed financing. It is also called structured funding because the risk is structured following the investor’s needs. Originator’s liability is in the form of credit enhancement.

Abhijith S

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