Securitisation: A funding alternative for Microfinance Institutions? Presentation on June 24th 2005 at the Conference “New Partnerships for Innovation in Microfinance” by Claudia Schneider and Harald Hüttenrauch, KfW Bankengruppe
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Introduction ! Microfinance Institutions (MFIs) are in increasing need of (alternative) funding and equity sources for financing their growth ! Securitisation in principle is a means of generating funding and equity Question: Is securitisation a suitable instrument for MFIs? 3
Securitisation in brief ! Securitisation is a financing technique whereby a set of stable and predictable future cash flows (“receivables pool”) is converted into tradable securities which are sold to investors. ! The payments of interest and principal on the securities, known as asset-backed securities (“ABS”) depend exclusively on the cash flow of the securitised receivables pool. ! ABS investors usually have no recourse on the originating entity. ! The receivables pool is sold from the originator to an insolvency- remote special purpose vehicle (“SPV”) , who pays the discounted purchase price from the cash proceeds of the ABS issuance. 4
Basic structure of a securitisation Originator 1 3 Senior Receivables Sale of 2 ABS receivables Issuance Pool SPV Mezzanine 4 5 Cash Cash proceeds proceeds from sale of Junior ABS 5
Tranching in securitisation Allocation of cash flows Senior Mezzanine Allocation of losses First Loss 6
Why do originators securitise? With securitisation …. ! Originators achieve funding based on the credit quality of their portfolio (which might be better than their own credit standing) ! Originators can better leverage their capital ! Originators can better manage their risk ! Originators can improve their asset liability management 7
Securitisation in brief Capit Ca pital Loan Loan markets markets Origination igination Bank ank Primary market Secondary market Interactive Pricing Standardisation of products From „buy and hold“ to active management 8
Securitisation in emerging markets Its shape? ! Securitisation is still in its early days in emerging markets ! Cross border transactions vs. domestic transactions ! Residential Mortgage securitisation most important asset class What is needed for (domestic) securitisation? ! Investor demand ! Certain depth and diversification of local capital market ! Appropriate legal and regulatory framework ! Servicer rating or (rated) back-up servicer ! Portfolio of standardised loan receivables ! Portfolio data and historical loss information 9
MFIs and securitisation Microloans are appealing assets for investors: ! Low default rates ! High granularity ! High standardisation ! High diversification ! Low prepayment risk ! limited impact of crisis/disaster on performance -> Investor education is needed. And data on: ! Historical losses and defaults ! Historical prepayments ! Borrower and loan data (…) 10
MFIs and securitisation Which MFIs might consider a securitisation transaction? ! Rated MFIs are accepted more easily as servicer, others might need a rated back-up servicer or guarantees ! Primarily: non-deposit taking MFIs looking for funding alternatives ! MFIs with good track record and strong MIS have advantages ! located in countries with conducive legal and regulatory environment and local investor demand. ! MFI should dispose on sizable loan portfolio and have strong origination power 11
MFIs and securitisation High cost of first transaction: ! external overhead cost: lawyer, rating agency, trustee, marketing, advisor/arranger ! internal overhead cost : data collection, adjustments in MIS for reporting and servicing might be needed, coordination with accountants and regulator ! Risk premiums : might be higher for debut transactions, since investors still need to get comfortable with performance -> Decision for securitisation should be a strategic decision with the objective of becoming a repeat issuer 12
MFIs and securitisation What can be achieved? ! (selected) MFIs can gain access to new funding sources ! Funding in LC at longer terms can be achieved ! Better leverage of MFI’s capital can be achieved ! MFIs can achieve growth objectives and increase outreach ! Building a secondary market for microloans ! On the long run: interest rates for clients can be lowered 13
Microloan securitisation: First Steps Wholesale models of ICICI, India SHARE Microfin Ltd Sale of Sale of Pool 1 & 2 Pool 1 & 2 (discounted) Other Microloan (discounted) ICICI Bank pool 1 commercial Bank in India Microloan pool 2 Cash Cash First Loss Funding for guaranty (Cash) First Loss guaranty Grameen Foundation 14
MFIs and securitisation - Securitisation of Loans to MFIs OPIC BOMS I (Closing 2004) Guaranty ABS Issuance: USD 40,9mn SPV Issue Proceeds Senior Notes BlueOrchard Microfinance 9 Loans to Securities I MFIs MFIs LLC Class A Notes Issue Bolivia Proceeds Cambodia Class B Notes Colombia Ecuador Class C Notes Nicaragua Peru Russia Equity 15
MFIs and securitisation What can development agencies do? ! Technical assistance for data work ! Finance legal studies ! Support lobbying for legal and regulatory changes ! Provide credit enhancement via (partial) guarantees (in LC) with improved leverage of the invested funds ! Provide contacts with rating agencies and arrangers 16
Topics for discussion ! What are the perspectives for wholesale models? ! What are the perspectives for international securitisation of MFI loans (fund models)? ! Pragmatic solutions for meeting data requirements? ! How can MFI networks help to make securitisation happen? 17
Feel free to contact us " Securitisation department of KfW: o Ms. Claudia Schneider (Vice President) +49 69 7431-3945 or Claudia.Schneider@kfw.de o Harald Hüttenrauch (Vice President) +49 69 7431-3964 or Harald.Huettenrauch@kfw.de 18
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