How to map a Securitisation Structure, Step by Step

Nine steps, in this order. The pool is written down as a single amount. Each instrument funding it is written down as a single amount. The instrument amounts are added and compared with the pool. The order of absorption is copied out of the documents. A total is run upward through that order. Each total is restated against the pool. Three jobs are named. The paying list is copied. Then whatever could not be found is written down.

A structure is a small number of amounts and one ordering, buried inside a very large stack of paper. The nine steps below get the amounts and the ordering out in a fixed sequence. Nothing is inferred before it has been read, and nothing that was never read gets quietly assumed along the way. The order of the steps is not a matter of taste: each one consumes what the step before it produced, so doing them out of sequence produces a map with no way of checking itself.

What is the analyst actually hunting for in all those pages?

Four neighbours put money into a food cart. One of them put in most of it and wanted the least exposure to a bad week. Before the cart was bought, the four of them wrote half a sheet saying who takes the first shortfall, who takes the next one, and who is touched only if the whole thing goes. Six months later somebody asks how bad a week has to be before the biggest contributor loses a rupee. The amounts are on the receipt. The answer is not on the receipt at all. The half sheet holds it, and the half sheet is the thing nobody photographs.

A securitisation structure is that half sheet written at scale, with a lot of other paper stacked on top of it. Sarvani Receivables Trust, an invented structure, holds Rs 1,200 crore of receivables and is funded by three instruments: a senior piece of Rs 960 crore, a mezzanine piece of Rs 180 crore and an equity piece of Rs 60 crore. All four amounts will be printed on any summary sheet. The summary sheet will not print the sentence saying which of the three is reached first when the receivables fall short, and that sentence is the reason the four amounts mean anything at all.

So the procedure has a shape. Steps one to three collect amounts and check them against each other. Step four goes and gets the sentence. Steps five and six turn the sentence and the amounts together into two figures small enough to carry in the head. Steps seven and eight collect two more things that must be copied rather than worked out. Step nine writes down the searches that came back empty.

Step one: what is the single amount that goes down before anything else?

Find the total of the receivables the structure holds, and write it once. For Sarvani Receivables Trust that is Rs 1,200 crore. Do not yet write down what the receivables are. Do not write down who owes them, when they fall due, or what was charged for them. One number, on its own line, with the word pool beside it.

The pool total is an odd place to start. It is the least interesting fact about the structure, and that is exactly the point. Everything downstream is measured against it, so an error in it, or a figure taken from the wrong document, puts five later figures wrong together and all five look consistent with each other. The pool total is the base every percentage on the finished map will be taken against, so it is worth going back to the document that states it rather than the deck that repeats it.

One caution at this stage. The moment receivables move from the lender that made the loans into a structure, there has been an assignmentThe legal act of moving a receivable from one owner to another. An assignment carries its own paperwork and its own transfer cost, and both vary with where the parties are., and the amount that moved may not be the amount the lender originally advanced. Take the figure that describes what the structure now holds, not what somebody once lent.

Step two: how are the instruments funding it listed?

List every instrument funding the pool, each with its amount and nothing else beside it. For Sarvani Receivables Trust that is Rs 960 crore, Rs 180 crore and Rs 60 crore. If an instrument carries a letter instead of a name, the letter goes down and the list carries on; the letter carries no information yet, and pretending otherwise is how people arrive at conclusions they cannot trace.

Resist the urge to annotate. Not the rate, not the expected life, not the form the instrument takes, not whether it is a pass-through certificateOne shape a note issued by a structure can take, in which collections are handed straight on to the holder rather than being reshaped into a fresh payment schedule. or something else. The next step is an addition, and an addition takes amounts only. Every one of those details is worth having later, and every one of them is a way of losing the thread now.

Step three: what does the addition actually establish?

Add the instruments and set the total beside the pool. The comparison that matters is vertical, and a sentence hides it inside a line of prose. Keeping it as a column rather than a sentence is worth the extra ten seconds.

Sarvani Receivables Trust is therefore funded exactly, and step three has done its job by producing a comparison rather than a total.

Two other outcomes are possible and they are not the same as each other. If the instruments come to less than the pool, the difference is a cushion the structure has, and it belongs in the notes as a feature to ask about. If they come to more, either the list is complete but an amount has been misread, or an instrument has been counted twice; either way it is a mistake in the reading rather than a fact about the structure. A shortfall is something to record; an overshoot is something to fix, and the procedure does not move to step four until the addition has resolved one way or the other.

Step four: where is the order written, and how is it copied?

Go into the documents and find the sentence that fixes the order. The sentence names which instrument is reached first when the receivables fall short, which is reached after that, and which is reached last. The order is usually one sentence long, and it is almost never on the summary sheet. Then write the three instruments out a second time, in that sequence, starting with the one reached first. For Sarvani Receivables Trust that is the equity piece first, the mezzanine piece next, and the senior piece last.

The sentence to look for is the ordering clauseThe sentence in the documents fixing which instrument takes a shortfall before which. Nothing else in the papers can stand in for it, and no arrangement of the amounts implies it., and copying it is the single most important physical act in this procedure. Three amounts on their own can be arranged three different ways, and no amount of arithmetic will show which arrangement the documents actually chose. This list cannot be derived. The order cannot be inferred from the sizes, and the habit of assuming that the biggest instrument must be the safest one is exactly the habit this step exists to interrupt.

Very little has been written down: two lists of three names, one sorted by size and one sorted by order, containing the same three objects. The second list looks like busywork until step five gets to work on it. Then the second list turns out to be the map, and the first list a filing exercise.

Step five: how much has to be gone before each instrument is reached?

Start at the bottom of the list step four produced and keep a running total on the way up. Nothing sits below the equity piece, so the running total before it is nothing. Before the mezzanine piece: Rs 60 crore, being the equity piece. Before the senior piece: the two amounts underneath it taken together, Rs 60 crore and Rs 180 crore, giving Rs 240 crore. Write the running total against each instrument on the second list.

There is a check available and it costs nothing. The running total at the top of the ladder, Rs 240 crore, plus the top instrument itself at Rs 960 crore, comes to Rs 1,200 crore, the pool from step one. The closure is forced rather than lucky: the running total at the top is everything except the top instrument, so adding the top instrument back can only give the whole. If it does not close, something upstream is wrong, and the arithmetic will not say which of steps one to four it was.

Compare the two lists of three numbers now in hand. Step two produced Rs 960 crore, Rs 180 crore and Rs 60 crore. Step five has produced nothing, Rs 60 crore and Rs 240 crore. The two lists are not the same three numbers rearranged, but a different set of facts about the same structure. The largest instrument happens to carry the largest figure in both lists, and that is a coincidence of this structure rather than a rule.

Step six: how is each running total written so that it survives being repeated?

Take each running total and set it against the pool, then write the base on the same line. Rs 60 crore against Rs 1,200 crore reads 5.0 per cent of the pool. Rs 240 crore against Rs 1,200 crore reads 20.0 per cent of the pool. The equity piece reads nought. A blank line invites the reader to supply a number of their own, so writing that nought down matters as much as writing the other two.

The percentages are what a reader carries away from a structure a week later, and that is precisely why the base has to travel with them. A figure carried away without its base feels like knowledge, and it can be repeated with confidence in a room where nobody checks it. A figure like that is worse than no figure at all. Say 20.0 per cent of the pool, every time, and never just 20.0 per cent.

Here is why that is not fussiness. On this structure, 20.0 per cent of the pool is what has to be gone before the senior piece is reached, and 80.0 per cent of the pool is the senior piece itself. Both readings are arithmetically correct against the same base. The two readings add to 100.0, a closure forced by the senior piece sitting at the top with everything else underneath it. Try the same pairing on the mezzanine piece and it lands on 20.0 rather than 100.0, so the closure is a property of the top position and not a property the reader can carry down the ladder.

The two figures step six produces have names elsewhere. The level at which an instrument starts absorbing is its attachment pointThe level of pool loss at which a given instrument first starts taking any of it. Standard vocabulary in structured credit, and defined properly where loss absorption is taught., and the level at which it has absorbed everything it can is its detachment pointThe level of pool loss at which that same instrument has taken all it is able to take and is exhausted. Its companion term, and likewise settled elsewhere.. The names can be written onto the map. The mechanism operating between the two levels is covered under loss absorption.

Step seven: which three jobs need a name written against them?

Three jobs, three lines on the map. Who transferred the pool in. Who collects from the borrowers month after month. And who the buyers of the instruments have standing over the structure for them. Each of the three needs a name found and written down. The duties of each of those parties, and what happens when one of them stops doing the job, are covered separately. This step produces three names, not three job descriptions.

Two practical points. One party doing two of the three jobs is common. Write the same name on both lines rather than leaving one blank. A blank line on a finished map is read later as a search that failed. A job done twice by one party is a very different thing. And where a name is a vehicle set up for this structure alone, write it as it appears in the documents, because a shortened version of it will not match anything in a later search.

On Sarvani Receivables Trust, one party both transferred the pool in and collects the instalments, and a separate party holds the structure for the note holders. Two names occupy three lines, and the map says so on its face.

Step eight: where is the paying list, and why is it a different list?

Find where the documents say who is paid before whom out of what the pool collects, and copy that list. Do not derive it. Do not assume it mirrors step four. Copy it, and stop there.

Step four found the order in which a shortfall is absorbed, and it runs from the bottom of the structure upward. Step eight finds the order in which money leaves the structure. The paying order is written in a different place in the papers, and it runs from the top downward. The list has a name, the cash flow waterfallThe period by period list of who receives money out of what the pool collects, and in what order. A separate subject, covered on its own., and what it does over successive periods is covered separately. Two lists, from opposite ends of the same structure, kept in different parts of the same documents, and reading either one as the other turns the structure upside down.

The everyday version is close at hand. In a household where a salary lands once a month, there is an order in which bills get paid, and there is a separate and unwritten order in which people go without when the salary is short. Both orders are lived, so nobody confuses them. On paper, with three instruments carrying letters, they are confused constantly.

Step nine: what goes in the box for everything the search did not find?

Draw a box on the map and put in it, by name, everything that was looked for and not found. Not a footnote. Not a caveat at the end of an email. A box on the sheet, the same size and weight as the others, filled in with the same pen.

Step nine is the step people skip, and whether somebody who did not make the map can trust it gets settled here rather than anywhere else. A map with an empty ninth box and a map with a full ninth box look equally finished, and only one of them shows how much of it was read rather than assumed.

Two kinds of thing go in. The first kind is an item that has an owner somewhere: what may be turned into a security at all, the retentionThe slice of its own structure the lender that sold the pool has to keep on its own books. How much, and in what form, is fixed by an authority and changes. the seller of the pool has to hold, what a buyer must be told before the instruments are issued, whether a clean-up callA right kept by one party to buy the last few receivables back and wind the structure up once very little is left inside it. exists and on what terms, and the tax treatment of the notes. Each of these gets an item and an address, never a value. The value is set by somebody who revises it, and a copy on the sheet goes stale without announcing that it has.

The second kind has no owner at all, and it is the larger of the two. The question every reader of a structure actually wants settled is how likely any of this is: how often a pool of this sort falls short, by how much, and whether the loans inside it tend to go wrong together or independently. Answering that needs a distribution of pool losses and a view on how the loans move with one another. Neither is available here, so no probability is supplied and no instrument is called safe, and the ninth box says so in those words rather than leaving the space blank to be filled in from imagination.

What does a finished map actually look like?

Two columns and one box, and it fits on one side of a sheet of paper. The whole output of nine steps is that small, and the smallness is the point: a structure that took four hundred printed sides to describe has been reduced to about fifteen numbers and two lists, none of which was guessed.

Run end to end on Sarvani Receivables Trust it reads like this. The pool is Rs 1,200 crore. The instruments funding it are Rs 960 crore, Rs 180 crore and Rs 60 crore. The three add to Rs 1,200 crore, so the structure is funded exactly and there is no cushion to note. The order taken from the documents runs equity piece, mezzanine piece, senior piece. Running a total up that order gives nothing, then Rs 60 crore, then Rs 240 crore. Against the pool that ladder becomes 0.0, then 5.0, then 20.0 per cent. One party both transferred the pool in and collects; a separate party holds the structure. The paying list was copied rather than worked out, and it runs the other way. And the ninth box carries three named absences and a set of addresses.

The two figures a reader will still have next week are 5.0 per cent of the pool and 20.0 per cent of the pool, and neither of them appears anywhere in the four amounts the procedure started with. They were manufactured by steps four, five and six out of one sentence and one addition, which is a fair summary of what the whole procedure is for.

Who actually sits down and does this, and when?

Somebody on a lending desk is shown four structures in an afternoon and has to say something sensible about each before the meeting ends. The map reduces every one of them to the same short shape, and only that shape makes them comparable. The comparison the map invites is between the running totals rather than between the sizes. Two structures whose largest instrument is 80.0 per cent of the pool in both cases can still have very different figures in the ninth box, and the ninth box is where the difference between reading a structure and being shown one lives.

Somebody inside the lender that made the loans does the same nine steps in reverse, before anything is issued. The lender knows the pool, having made it. The check is whether the documents actually say, in one findable sentence, the thing everybody in the room believes they say about the order. Structures have been assembled where the ordering clause and the paying list did not match anybody’s summary of them, and the cheapest moment to find that out is while the papers are still drafts.

Somebody writing a note for other people to read does the nine steps to protect themselves. A note that can be checked and a note that has to be believed differ in one thing: whether the map behind them carries a filled ninth box, showing how much of the note came from documents and how much came from a deck.

And a household does a version of it without calling it anything. Handed a builder’s payment plan, the useful reading is not the total, which everyone quotes, but the order: what has to happen before the next instalment falls due, what happens to money already paid if the sequence stalls, and which of those questions the paper simply does not address. Same nine steps, one sheet of paper, no rupee amount above a few lakh. The procedure does not care about the scale.

Where does a written procedure stop stating things, and start pointing?

Every step above ends somewhere. Steps one to six end at an amount, and the amount came off a document. Steps seven and eight end at a name and a list, and both were copied. Step nine ends at an address, and it is worth being blunt about why. A rule is written by whoever has the authority to change it, and that same authority does change it. Any transcribed copy of a rule is a slowly rotting thing. The live wording is what is needed. A written procedure can give the location of the live wording, keyed to the box on the map where the question came up.

What would varying the pool actually show?

A control earns its place where two quantities pull against one another and the shape of the pull is what the reader came for. Drag one, watch the other, and the relationship arrives faster than any paragraph can deliver it. Nine instructions have no such shape. Instructions have an order, and an order is not a curve.

Pulling the pool away from Rs 1,200 crore would redraw the worked example and show nothing that step three does not already say in words. The one genuine relationship in this material runs between a shortfall in the pool and how much of it each instrument takes, and that belongs with loss absorption rather than with the procedure that points at it. A different question is worth putting instead: what breaks if somebody runs the nine steps out of order?