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CMA Final · Strategic Financial Management · Securitization

In a securitisation transaction in India, a bank (originator) sells a pool of auto loans to a special purpose vehicle (SPV), which issues pass-through certificates (PTCs) to investors. Which statement best describes the role of the SPV?

The SPV purchases the receivables from the originator and raises the funds by issuing securities such as pass-through certificates, which are paid out of the pool's collections. It is a bankruptcy-remote conduit, not a guarantor or a general lender to the originator.

  1. AIt services the borrowers and bears the credit risk of the originator's other loans
  2. BIt buys the receivables from the originator and funds the purchase by issuing securities backed by the pool's cash flowsCorrect
  3. CIt guarantees the principal and interest on the PTCs from its own capital
  4. DIt lends to the originator against its balance sheet and takes a floating charge over all assets

Explanation

The SPV is a bankruptcy-remote entity that acquires the receivables in a true sale and finances the purchase by issuing PTCs or other securities serviced from the pool cash flows. It does not guarantee the securities from own capital, and it is not a general lender to the originator.

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