MLD) Instrument: IIFL MLD-2021-G2 Credit Rating: CRISIL PP-MLD AA+r - - PowerPoint PPT Presentation

IIFL CEM (Credit Enhanced MLD) Principal Protected - Credit Enhanced - Market Linked Debenture

Instrument: IIFL MLD-2021-G2 Credit Rating: CRISIL PP-MLD AA+r (CE)

Factors impacting Debt investment decision by Investors

 Credit / Default Risk:

• Credit market has been stung by a yearlong shadow banking crisis that started with shock defaults last year by IL&FS group.
• The crisis further got exacerbated by missed payments by firms including non-bank financiers DHFL & Reliance Capital, travel

planner Cox & Kings Ltd. and wind-turbine maker Suzlon Energy Ltd.  Decreasing Interest Rates:

• Rate cuts by RBI in-line with lower inflation numbers and benign inflation expectations has brought interest rates lower with

expectations of further rate cuts moving up. Repo rate at 5.15 percent is the lowest since March 2010

• Banks have reduced their FD rates in line with lending rates and 10-year bond yields have fallen to 6.7%

Investment Option Average Returns (Pre-tax) Credit Risk Taxation * Arbitrage Funds 6 - 7% Nil 10% LTCG Bank FDs 6 - 7% Low Taxed at MMR Ultra Short-Term Funds 6 - 7% Low –Medium Taxed at MMR Short-Term Funds 7 - 9% Medium-High Taxed at MMR

Current return scenario of Traditional Investment avenues for 18 to 24 months 2 *applicable cess & surcharge extra

• Traditional Investment Products are currently offering low to medium returns with medium to high level
• f safety.
• Corporate Bonds, NCDs and Credit risk MF schemes that offer higher return in 1-2 years horizon carry

higher Credit Risk / Default Risk

What if investors have an option to get attractive yields with higher level of safety?

Introducing IIFL Credit Enhanced Market Linked Debentures (CEM) - with High safety (AA+ rating) and High pre-tax IRR of 9% for average tenure of 18

• 24 Months !!!

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Introducing IIFL Credit Enhanced Market Linked Debentures (CEM)

• A Principal Protected, listed & Rated Market Linked Debenture (Rated AA+ r (CE) by CRISIL) Issued by India Infoline Finance Ltd.

(Rated AA by CRISIL)

• Gold loan receivables originated by IIFL and assigned to the SPV with an initial cover of 1.25 times the issue size and an extra

collateral in the form of Bank Guarantee (7% of issue size)

• A pre-tax IRR of 9.00% p.a. (7.72% p.a. post-tax ... assuming LTCG of 14.25%) with maturity ranging 18 months – 24 months

Payoff:

Credit Enhanced MLD - Market Linked Debenture

Final Value > 50% of the Initial value Final Value <= 50% of the Initial Level Get Principal back Principal + Coupon IRR of 9% (after factoring in Principal Repayment) IRR of 0%

Initial Value = Clean Price of underlying security on Trade Date Final Value = Clean Price of underlying Security on date falling 5 BD prior to the date on which the entire Principal is repaid Underlying Index / Security : 7.26% GS 2029 (10yr G-Sec)

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Issue Structure

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SPV IIFL Finance

Interest + Principal received on Gold Loan Gold Loan 1 Gold Loan 2 Gold Loan 3 Collateral – Gold Loans

Borrowers

Investors

Securitised & MLD issued MLD 1 MLD 2 MLD 3 Payout secured IRR @ 9% at the end of MLD Collateral – Gold Loans Payout secured Payout secured Payout secured Payout secured

Diagram is given is for illustration purpose

• Minimum seasoning – 3 months
• Maximum tenure – 11 months
• Geography distribution – max 25% per state (region)
• Per customer exposure will be capped at 1%
• Weighted average balance tenure of the pool at all time will be less than 6 months
• Average LTV (on Gold Value) for disbursements in March 2019 stood at 71.9% as against 70.5% in March 2018

Criteria for Gold loan identification

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• Cashflows (interest / principal) received from Gold Loans post 12 months of issuance will be used to partly pay down principal of the

MLDs

• Coupon amount subject to realization of market condition, will be paid only at maturity.

The above table is for illustration purposes only. The actual interest payout will be determined based on the actual payout schedule and yield fixed at 9% p.a. (pre-tax, after factoring-in principal payment)

Month Cashflow Comments

• 100

Invested in MLD 14 10 Principal repaid in multiple tranches (only for illustration) Payment schedule will differ 15 15 16 20 17 20 18 35 24 13.33 Coupon (interest) repaid* Investor XIRR 9.00%

Illustrative Cashflows - IIFL CEM

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Why one should invest in CEM? (1)

 Credit Enhancement

• Instrument rated AA+ r (CE) by CRISIL over the issuer (IIFL Finance) rating of AA by CRISIL , because:

 MLD issued is bankruptcy remote i.e. Investor is not subject to the credit risk of the issuer  Guaranteed by SPV, which will service cash flow if not paid by the issuer  SPV holds Gold Loans worth 1.25x of Nominal Value of the Debentures issued throughout the tenor of MLD  Extra collateral in the form of Bank Guarantee (@7% of the issue size) will be provided to the SPV by the issuer  Lock-in High Yields

• Pre-tax IRR of 9% p.a. - attractive for average tenure of 18-24 months

 Tax Efficient Wrapper

• Listed secured NCD - Capital Gains arising from the sale of NCD taxed @ 10% + applicable surcharge & cess*

* Taxation Laws may change as per applicable regulations at the time of maturity 8

 Secured by Gold Loans

• A secured loan in which a customer pledges his/her gold ornaments as collateral with Gold Loan Company
• The Company in turn gives a loan amount (typically 70%) as per the market value of gold to the customer
• Gold loan as a product has the lowest NPA rates

 IIFL Finance as an Issuer

• Established player in Gold loan against gold business with an operational track record of almost 9 yrs
• Loan Tenors ranging majorly within 9 to 12 months tenure bucket with principal repaid at maturity
• Has right to auction gold and recover the loan amount if interest / principal is not paid for 90 days
• Current Loan portfolio being 6,195 crores: with the 180+DPD (Days Past Due) being 0.2% in FY19
• Avg LTV (on Gold Value) for disbursements in March 2019 stood at 71.9% as against 70.5% in March 2018

Why one should invest in CEM? (2)

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Looking to benefit from the favorable taxation rate* of 10% Capital Gain tax Vs 30% for Bank FDs and other short term debt instruments Looking for a product that can potentially offer higher fixed return than Bank FDs Looking to invest for tenure of 18 / 24 months with high level of safety Looking for Principal protection as product feature

Who should invest in this product?

10 * Taxation Laws may change as per applicable regulations at the time of maturity

Looking for regular cash flow after a Year

The actual interest pay-out will be determined based on the actual pay-out schedule and yield fixed at 9% p.a. (pre-tax, after factoring-in principal payment)

Terms Description Issuer IIFL Finance Credit Rating of the Issuer AA by CRISIL Instrument Credit Enhanced Market Linked Debenture Credit Rating of the Instrument AA+ r (CE) by CRISIL Tenure 18M/24M Return (XIRR) 9% p.a. (based on pay-off) Benchmark / Underlying 7.26% GS 2029 Collateral Gold Loan Pool and Bank Guarantee Liquidity Listed on NSE - hence tradable

Key Terms to be considered by the investor

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Terms Description Initial Level Clean Price of underlying security on Trade Date Final Level Clean Price of underlying Security on date falling 5 BD prior to the date on which the entire Principal is repaid Pay-off If Final Value >50%*Initial Value then Principal + Coupon (TBD); Else only Principal Initial Value = Clean Price of underlying security on Trade Date Final Value = Clean Price of underlying Security on Trade Date+18M Underlying Index / Security : 7.26% GS 2029 (10yr G-Sec) Face Value per Debenture 10 Lacs Issue Size

• Rs. 400 Crores

Min Investment Amount 10 Lacs & further in multiple of 10 Lacs

Key Terms to be considered by the investor

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 Price risk

Volatility in gold prices entail market risk and the possibility of gold loans going out of the money which could result in borrowers defaulting

• payments. Lower gold prices could also affect recovery prices and could prove detrimental to profitability. However, LTV of ~71% (regulations

cap at 75%) gives a buffer & lower tenor of loans act as risk mitigants. Additionally, margin call will be given to customers if outstanding dues are above predefined thresholds.

 Default risk

The risk that borrower is unable to make the required payments on their borrowing obligations. Issuer does KYC Check/tele verification/address verification to ascertain repayment capacity of borrower. The company classifies a contract as NPA if it is overdue for more than 90 days on its interest/principal payments. IIFL reserves right to auction contracts in case of default events. Auctions are done on monthly basis & in most cases recovery from auction takes place within one month.

 Branch Security

Risk arising due to fraud, vandalism, sabotage, accidents, and theft. Gold is generally stored at lending branch to minimize transit costs. GPS cameras are installed in the branches for real-time. monitoring. The vault room is equipped with sensor alarms that triggers call to multiple phone numbers including that of the nearest police station. Additionally, the collateral in the branches are insured against theft, fire and fraud.

 Asset Quality

Risk arising out of inaccurate appraisal of gold content. Value of collaterals will be ascertained by multiple evaluators before loan disbursement. There is a 250 member audit team which does scheduled audit of branches at a frequency varying between 15-60 days basis branch’s risk

• profile. There is also a 50 member vigilance team which conducts surprise audits across branches. In addition an external vendor is appointed

to who is responsible for e-surveillance of all branches.

Associated Risks

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Key Risk Disclosure and Disclaimer

• 1. The information provided is not intended to be used by investors as the sole basis for investment decisions, who must make their own

investment decisions, based on their own investment objectives, financial positions and needs of specific investor. The information provided may not be taken in substitution for the exercise of independent judgment by any investor. The investor should independently evaluate the investment risks and make independent judgment with regard suitability, profitability, and fitness of any product or service offered herein above.

• 2. Some of the products described hereinabove may be developed and offered by third parties ('third party products'), which IIFL Securities may

be making available to you. IIFL Securities does not endorse or guarantee these third party products in any manner and will not be liable for their performance or otherwise. The products described in this document may not be protected against sovereign risk including risks arising from any changes in applicable Indian or other relevant laws, represent speculative investments and may involve a high degree of risk. Investors' capital may not be guaranteed in any respect and they could lose all or substantial portion of their investment.

• 3. Please familiarize yourself with all the terms and conditions pertaining to the specific products and services prior to availing of it.

IIFL Securities is not acting as your advisor or in a fiduciary capacity in respect of the products and services referred to in this document, and accepts no liability nor responsibility whatsoever with respect to the use of the information provided hereinabove.

• 4. Investors to exercise their own independent judgment in using any of the information and documents – Termsheet, Presentation and

Information Memorandum provided by IIFL Finance Ltd. and conduct separate research into the suitability of the product for a particular financial situation, circumstances, attitudes, motivations and preferences. Investors should consult their financial advisers for the suitability of the product and advise on investments.

• 5. IIFL Securities or any of its director/s or principal officer/employees and associate companies do not assure/give guarantee for the

performance of returns on your investments.

Key Risk Disclosure and Disclaimer

• 6. Please note that Investments are subject to multiple risk factor. Read the Information memorandum for full understanding and detail carefully

before investing. The investor should independently evaluate the investment risks before making the investment decision.

• 7. IIFL Securities as part of their services might be distributing their products to clients or prospective investors. IIFL Securities or its associates

may or may not hold the above referred securities being distributed as part of their own investments.

• 8. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or

implied, is made regarding future performance. Information, opinions and estimates contained in this report reflect a judgment of its original date of publication by IIFL and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise.

• 9. The Report is purely for information purposes and does not construe to be investment recommendation/advice or an offer or solicitation of

an offer to buy/sell any securities.

• 10. Investors should not solely rely on the information contained in this Report and must make investment decisions based on their own

investment objectives, judgment, risk profile and financial position. The recipients of this Report may take professional advice before acting on this information.

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