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1.
Presentation Structure
Basics of structuring
Par and Premium
Concept of Tranching
What is credit enhancement
Optimizing credit enhancement
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2.
Structuring Concepts
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3.
Structuring Basics
Pool cashflows are homogenous in nature and carry inherent risks
Structuring of cashflows gives originators the flexibility to tailorinstruments meeting investors requirements
Risk appetite
Tenor requirements
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Basic Structuring - Par and Premium
Par Structure
Investor pays a consideration equal to the principal component (par value)of the future cash flows
In return, investor is entitled to the scheduled principal repayments from
the pool in addition to the contracted yield (called PTC yield) every month Typically, yield of asset > PTC yield which results in generation of excess
cash flows every month (called Excess Interest Spread, EIS)
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Par Structure - Illustration
Loan Amount: Rs 1,000; Loan Interest rate: 15%, tenure: 6 years,
PTC rate: 7% per annum
Note:
Investor POS = Pool POS
EIS flow every month as loan interest rate > PTC rate
Principal Interest Total (a) Pool POS Principal Interest Total (b) Investor POS
0 1,000 1,000
1 114 150 264 886 114 70 184 886 80
2 131 133 264 754 131 62 193 754 71
3 151 113 264 603 151 53 204 603 60
4 174 90 264 430 174 42 216 430 48
5 200 64 264 230 200 30 230 230 34
6 230 34 264 - 230 16 246 - 18
Total 1,000 585 1,585 1,000 273 1,273 312
Asset side Liability side - Par structure Year EIS (a-b)
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Basic Structuring - Par and Premium
Premium Structure
Investor is entitled to the entire cash flows (EMIs) from the pool
every month
Investor pays a consideration greater than the principal
component of the future cash flows
The purchase consideration is the net present value of the entire
cash flows discounted at a contracted rate (called PTC yield)
No EIS in premium structures
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Premium Structure - Illustration
Note:
Investor POS = Net present value of cash flows discounted at 7% pa
Investor POS Pool POS
Monthly payouts to investor = Monthly cash flows from loan
No EIS
Principal Interest Total (a) Pool POS Principal Interest Total (b) Investor POS
0 1,000 1,2591 114 150 264 886 176 88 264 1,083 -
2 131 133 264 754 188 76 264 895 -
3 151 113 264 603 202 63 264 693 -
4 174 90 264 430 216 49 264 478 -
5 200 64 264 230 231 33 264 247 -6 230 34 264 - 247 17 264 - -
Total 1,000 585 1,585 1,259 326 1,585 -
YearAsset side Liability side - Premium structure
EIS (a-b)Pool Investor Payouts-Premium
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Comparison of par and premium structures
Par PremiumAmount raised 1,000 1,259Total PTC obligationsover the tenure 1,273 1,585EIS 312 -Total payouts 1,585 1,585
Comparison
Upfront amount raised: Higher in premium due to discounting of entirecash flows.
The difference in the form of EIS flows to originator periodically in par
structures
Availability of EIS: In par structures, EIS can act as a form of internalcredit enhancement reducing cash support requirement
Par structures more amenable to complex structuring: due tomatching of principal on asset and liability side
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9.
Presentation Structure
Basics: Par and Premium
Tranching concepts
What is credit enhancement
Optimizing credit enhancement
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10.
Tranche means a piece, portion or slice of a securitisation deal
Tranching of cash flows: cash flows from securitised assets
carved into multiple classes/tranches
Tranching can be done to achieve various investor needs
Tranching Concepts
Time Tranching Risk TranchingPrepayment
Tranching
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11.
Time Tranching:
Sequential tranching
Creation of securities having differing
durations
Tranching Concepts
MonthPool cashflows Class A1 Class A2
1 100 100 02 100 100 0
3 100 100 04 100 100 05 100 100 06 100 100 07 100 0 1008 100 0 100
9 100 0 10010 100 0 10011 100 0 10012 100 0 100
Total 1200 600 600
Originator SPV Investors
Cash flows fromsecuritisedassets
6 month PTCs
1 year PTCs
5 year PTCs
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12.
Risk Tranching:
to create instruments with different risk profile
senior class accorded first priority on cash flows
subordinate class supports payments to senior classes
subordinate classes carry lower credit ratings
Tranching Concepts
Originator SPV Investors
Cash flows fromsecuritisedassets
Senior PTCsAAA(so)
Subordinate PTCs
BBB(so)
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13.
Risk Tranching
Month
Pool cash
flows
Senior
PTC
Junior
PTC
1 100 90 10
2 100 90 10
3 100 90 10
4 100 90 10
5 100 90 10
6 100 90 10
7 100 90 10
8 100 90 10
9 100 90 10
10 100 90 1011 100 90 10
12 100 90 10
Tota l 1200 1080 120
T hi C t
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14.
Prepayment tranching: To mirror
bonds
All the prepayments allocated to a
separate strip called prepayments strip
(Series P)
Main Investor (Series A) insulated
against any volatility arising out of
prepayments
Volatility of cashflows to Series P is
taken care of in pricing of the instrument
Tranching Concepts
Prepayments createvolatility in cashflows
Investors have apreference for bond-likepayouts
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15.
Presentation Structure
Basics: Par and Premium
Tranching concepts
What is credit enhancement
Optimizing credit enhancement
Wh t i dit h t
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16.
What is credit enhancement
A source of funds which protects investors in case
losses occur in the securitised assets Is typically stipulated by rating agencies
Represents a limited back up support against potential
shortfalls
Credit enhancements thus improve the credit quality ofthe securitised instruments in order to achieve the
desired credit ratings
What is credit enhancement
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17.
What is credit enhancement
Sources of credit enhancement Internal
Subordinate cash flows
Excess interest spread
External
Cash collateral, Corporate guarantee
A combination of the above forms of credit enhancement is normally used in atypical transaction
Types of credit enhancement
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Types of credit enhancement
Cash collateral: The originator/ third party provides a predetermined amount of
cash, which is put into a reserve account.
Withdrawals can be made from this account to offsetlosses/shortfalls on the securitised assets.
The cash collateral is held/operated by the trustee in favour of the
investors.
Types of credit enhancement
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19.
Types of credit enhancement
Excess interest spread:
Available in par structures where the interest rate received on
underlying loans is higher than the interest rate paid on the PTCs
backed by those loans.
This gives rise to an excess margin or spread that can be applied to
offset shortfalls in the pool collections.
Types of credit enhancement
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20.
Types of credit enhancement
Subordinate tranches/ Overcollateral: Senior-subordinate multiple tranche structure, where the
subordinate tranches act as a credit enhancer for the seniortranche. :
For example, if Rs 150 million of assets backs Rs 100 million ofPTCs, then Rs 50 million is the overcollateral in the transaction.
After meeting senior payouts, balance cash is used to make
payment on subordinate tranches
Presentation Structure
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21.
Presentation Structure
Basics: Par and Premium
Tranching concepts
What is credit enhancement
Optimizing credit enhancement
Optimizing credit enhancements
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22.
Our previous example: Loan Amount: Rs 1,000; Loan Interest
rate: 15%, tenure: 6 years, PTC rate: 7% per annum
Monthly cash flow loss @ 25%
Premium structure
Optimizing credit enhancements
Scheduledcashflows collections
Investorpayouts Shortfalls
1 264 198 264 662 264 198 264 663 264 198 264 664 264 198 264 665 264 198 264 666 264 198 264 66
Total 1,585 1189 1,585 396
Year
Asset side Liability Side
Cash support needed:25% of pool cashflows
Optimizing credit enhancements
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23.
Subordination of 10%
Monthly cash flow loss @ 25%
Premium structure
Subordination acts as an internal credit enhancement
Lower requirement of external credit support in the form of cash
Optimizing credit enhancements
Scheduledcashflows collections
Seniorpayouts Shortfalls
1 264 198 238 402 264 198 238 403 264 198 238 40
4 264 198 238 405 264 198 238 406 264 198 238 40
Total 1,585 1189 1,427 238
Year
Asset side Liability Side Cash support needed:
15% of pool cashflows
Optimizing credit enhancements
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24.
Par structure
Monthly cash flow loss @ 25%
Available EIS=20% of cashflows
EIS acts as an internal credit enhancement
Lower requirement of external credit support in the form of cash
Scheduled
cashflows collections
Investor
payouts Shortfalls
1 264 198 184 - 80 14
2 264 198 193 - 71 5
3 264 198 204 6 60 -
4 264 198 216 18 48 -
5 264 198 230 32 34 -6 264 198 246 48 18 -
Total 1,585 1189 1,273 103 312 19
EIS
available
EIS flow
backYear
Asset side Liability Side
Optimizing credit enhancements
Cash supportneeded: 6.5% ofpool cashflows
If the EIS is trapped, cash support needed will be even lower
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