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Securitised Debt Instruments

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Key Highlights

  • Securitised Debt Instruments (SDIs) are financial products created by pooling various debt assets such as loans, receivables, or mortgages and converting them into tradable securities.

  • Types of SDIs includes asset-backed securities (ABS), mortgage-backed securities (MBS), pass-through certificates (PTCs).

What are Securitised Debt Instruments?

Securitised Debt Instruments (SDIs) are financial products created by pooling various debt assets such as loans, receivables, or mortgages and converting them into tradable securities. These instruments allow investors to gain exposure to diversified debt portfolios while providing liquidity to lenders.

How They Work?

  • A financial institution aggregates multiple underlying loans or receivables.

  • These assets are transferred to a Special Purpose Vehicle (SPV).

  • The SPV issues securities backed by the cash flows generated from these assets.

  • Investors receive periodic payments based on repayments from the underlying pool.

Types of SDIs

  • Asset-Backed Securities (ABS): Backed by receivables such as auto loans or consumer credit.

  • Mortgage-Backed Securities (MBS): Supported by residential or commercial mortgage loans.

  • Pass-Through Certificates (PTCs): Widely used in India, offering direct pass-through of cash flows.

Benefits of Securitised Debt Instruments

  • Diversification: Exposure to a broad pool of borrowers reduces concentration risk.

  • Stable Cash Flows: Regular payments linked to loan repayments.

  • Attractive Yields: Often higher than traditional fixed-income products with comparable risk.

  • Rating Transparency: Most SDIs are rated by credit agencies, aiding informed decision-making.

Risks & Considerations

  • Prepayment Risk: Early loan repayments may alter expected returns.

  • Credit Risk: Performance depends on the credit quality of underlying borrowers.

  • Liquidity Risk: Some securitised products may have limited secondary market trading.

  • Structural Complexity: Requires investor understanding of SPV structures and underlying asset pools.