What do you mean by Securitization? What are the Types of Securitization? Which was the first non-assets, backed Securitization deal in Saudi?

Securitization is considered as a method of conducting the liquid assets and other assets of the entity with the help of financial engineering and converts them into security. It is considered as a procedure in which designs of marketable financial assets are accumulated on a single platform in a one group. Securitization gives opportunities for the investor and originates the liquidity of the market place. Financial assets could be securitized and it could be changed into negotiable instruments or in the monetary terms. In common practice, several types of debt or loan could be modified which could be based on the debt obligation and loan debts (Acharya, Schnabl, & Suarez, 2013).

Types of Securitization: Securitization gives opportunities for the investor and originates the liquidity of the market place with the help of financial assets owned by the company. There are various types of receivable that determine the types of securitization that is required in the financial terms. Followings are types of securitization in common:

·         Asset-based securities (ABS)

The bonds or the long term securities which are supported or backed by the financial assets are underlying the support of financial assets. The account receivables are converted in the Asset-Based securities ABS such as credit card, debit card, student loans, home loans as well as auto loans etc. all these could be involved into Asset-Based securities ABS (Gorton & Metrick, 2013).

·         Residential mortgage-backed securities (MAB)

The bonds and the securities which are mortgaged such as mortgage of property, land, house, jewelry and other precious ornaments or valuable assets in the market to are comprised to be mortgage is known as Residential mortgage-backed securities (MAB).

·         Commercial Mortgage-Backed Securities (CMBS)

The bonds which are formulated by the various kind of trading assets in the collection on a single place such as office building, commercial land, factory as well as plant equipment etc.

·         Collateralized Debt Obligations (CDO)

The CDO are the assets or the bonds which are designed be recollection of the personal debts to consume in the secondary market according the perspective of investors.

·         Future Flow Securitization

These instruments are issued by the organization over and above of the loans receivable in coming period. In this case, the company meets the principle amount plus interest in the business operations which are secured against the future investment.

The first non-assets, backed Securitization deal in Saudi

Tasheel group announced securitization of its receivables on installments of the sales as Tasheel program which is known as first non-assets backed by securitization of the Saudi company. The receivable were sold in return of cash flow of SR160mn to Al-Rajhi bank. The section which is securitized was calculated as 41% of the outstanding balance of the installments sale. Al-Rajhi bank deals with the multiples impacts which are used in the future profits and the cash flows. It increases the capacity of the installment issuance with low debts. The growth of the company was estimates by 14.3% for 2019 and 9.4% for 2020.

Al Rahji Capital agreed with the terms that further have figured out how to maintain a decent credit quality for the credit section, by estimating the rate which is under the 10% and NPL proportion bottom of the 3%.  It could be anticipated that securitization is used to improve the performance of credit department as it moves the large section of the credit hazard to a budgetary foundation that is considered as better measure to manage it. Al Rajhi has managed its receivables with only a rebate of 4% features that is a better step in the great credit quality (Jeffries, 2004).

The credit crumb of deals of Extra has been developing quickly during the most recent three years as it came to nearly 7.5% in the last details provided by the company such as up from 3% in FY17 and 7% in FY18 according to our analysis of the data of the company. This securitization of 41% of their credit deals related with more credit limit accessible, we anticipate that this extent should increment to 9%-10% in FY19E and stimulate Extra deals definitely. This first securitization deal help the company to recognize the extra profit which is calculated as 8% in return of additional profit collected in the previous data. The company stand on the position at 19% with a perfect cash flow balanced at SR223mn.

1.      Pass journal entries in the books of lease contract by creating lease receivable at its net investment in which is equal to the minimum lease payments discounted at the rate of interest implicit in the lease.

There is no proper amount given in the question it is assumed to be record the lease entries of the company as the investment is receivable at the minimum discount rate. To learn about the lease journal entries here we solve a question such as below explained:

ABC inc. is a company which has leased out the generators from JK ltd. To provide the backup to the transportation of the system during works. The lease has 5 years plan in which ABC has to make $500,000 payment to JK at the end of each year. The inspection of the first payment in the books of ABC in case of minimum payment is $1,996,355 and rate of interest is 8%.

The entries are going to made in the book of lessor, the lessor shall record the initial of the lease by creating the net investment receivable in which equal minimum lease payments are discounted at the rate of implicit interest rate (Shough, 2011).

At the first payment, lessor must record the receipt of cash, reduction in the receivable and recognition of the financial income.

The decrease in the account receivable decrease the principle balance in the net receivable of the amount that shall reduce the income of next year

Accounting for lessee

A finance lease comes in the results that are recognized both in assets and the liability in the accounts books of lessee at the time of inspection of the books amount is equal to the minimum payment of the lessee.

It might be possible that the lease assets and lease liability are recorded in the different amounts in the books of lessor and lessee.

At the time of first annual payment the lessee records the following journal transactions:

At the end of the first year, the lessee shall post extra journal entry to recognize the depreciation expense on the leased assets. It depreciates the leased assets as if it is an owned asset (Souza, Salazar, Moraes, Leite, & Ivanova, 2016).

References of Securitization and Lease

Acharya, V. V., Schnabl, P., & Suarez, G. (2013). Securitization without risk transfer. Journal of Financial economics , 107 (3), 515-536.

Gorton, G., & Metrick, A. (2013). Securitization. In Handbook of the Economics of Finance , 1-70.

Jeffries, I. (2004). The countries of the former Soviet Union at the turn of the twenty-first century: the Baltic and European states in transition. Routledge.

Shough, S. (2011). "Proposed Lease Accounting For Lessees. Journal of Business & Economics Research , 9 (1).

Souza, A. G., Salazar, V. S., Moraes, W. F., Leite, Y. P., & Ivanova, M. (2016). Entry modes: Lease contract. The Routledge handbook of hotel chain management , 185-192.