Asset Securitisation and Long Term Financing in The Power Sector

Asset Securitisation
&
Long Term Financing in the Power Sector
A presentation
to
Nigerian Electricity Regulatory Commission

25th of January, 2007
By
Mr. Sonnie Ayere
Managing Director / CEO
UBA GLOBAL MARKETS

Introduction
Introduction
What is Securitisation ?
l Securitisation is the raising of debt secured on the cashflow and/or
collateral value of a selected pool of assets
l Securitisation debt is non-recourse to the originator, so that investors
depend solely on the performance of the assets and are insulated from
the financial condition of the originator
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Sonnie Ayere Debit Capital Markets
Introduction cont’
l Pure asset securitisation is generally achieved by legally and
economically isolating the receivables / assets from the balance sheet of
the originator
l This is achieved by what is commonly referred to as a “True Sale” of the
assets or receivables
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Range of Debt Markets
&
Assets
Range of Debt Markets
Illiquid Highly liquid
Actively
Non tradable Tradable Commercial Public
Traded
Private Placements Private Placements Paper issue
bonds
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Range of Assets
l Generally, any asset that produces a certain level of predictable cashflow
can be securitised
l Both short-term (e.g. trade credit ) and long-term (residential mortgages)
can be securitised
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Range of Assets cont’
l Examples of asset types that have been securitised
l Residential and Commercial Mortgages
l Auto / Equipment / Aircraft Leases
l Credit Card Receivables
l Auto and Consumer Loans
l Bank and Corporate Debt
l Trade Receivables
l Export and Domestic Corporate Receivables
l Air Ticket Receivables
l Workers Remittances
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Typical Structure of a Securitisation
Typical Structure of a Securitisation
SPV
Special Purpose
Sale & Service of Issuing Vehicle
Receivables
Seller, Servicer Assets Liabilities
Assets Liabilities Sr. ABS Sell ABS Senior

Receivables (AAA) Investors
Debt Service
Pool Purchase
Receivables Receivables
Pool Mezz. ABS Sell ABS Subordinated
(BBB/BB) Debt Service or Mezzanine
Jr. ABS Investor
(Equity)
Retain Residual Interest (First Loss)
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Key Elements of Securitisation
l In-depth knowledge of the assets
l Isolation / transfer of assets
l Servicing
l Credit Rating (Domestic or International)
l Legalese and Deal Documentation
l Placement
l Monitoring
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Basic Transfer Mechanism
SPONSORING COMPANY
Accounts
Receivable
Sale or Assignment
SPECIAL PURPOSE
VEHICLE
ISSUES
Accounts
ASSET-BACKED
Receivable
SECURITIES
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Methods of Asset Transfer
l Novation – An arrangement that involves the termination of the existing
contract and the writing of a new one
l Sub-Participation Funded or Unfunded - Involves one party depositing
monies which may only be repaid when the underlying assets pays or
unfunded when the related loan is drawn or the the asset defaults
l Assignment – Full transfer of the assets to the assignee
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Case Study
Case Study
IPP Securitise its Receivables
l Some factors need to be in place before a securitisation can occur.

Some of which are:-
– Corporate commitment
– Management depth
– Internal systems (servicing, and collection)
– Available and up to date information (company and collateral)
– Origination capacity
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Case Study
IPP Securitise its Receivables
l Other factors necessary are :-

– Ability to legally assign receivables
– Enforceability of law
– Ability to perfect interest quickly - property
– At least a 5 year fixed rate government curve – the longer the better
– Electronic payment systems e.g. direct debits
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Initial Contract and Receivable
Consumers of Power
Agreement
Disco
Monthly Payments
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Transfer of Receivables to SPV
Consumers
Monthly
Payments
proceeds proceeds
Disco Receivables Investors
Funding Trust
Sale of monthly Asset Backed
payments Securities
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Independent Trustee appointed & reallocation of
cashflow
Consumers
Monthly
Trustee
Payments
Principal &
Interest
proceeds proceeds
Funding Trust - A
Sale of Asset Backed
Receivables Securities
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Allocation of Excess Spread
Consumers
Principal &
Trustee
Interest Principal &
Interest
proceeds proceeds
Funding Trust - A
Excess Spread +
Servicing Fees
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Introduction of Swap counter-party and Guarantor
Consumers
Principal &
Trustee
Interest
proceeds proceeds
Funding Trust - A
Sale of Assets Asset Backed
Securities
Excess Spread +
Servicing Fees Financial
Swap Guarantor
Counter party
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Other form of Credit Enhancement considered
Consumers
Principal &
Trustee
Interest
proceeds proceeds
Funding Trust - A
Excess Spread +
Servicing Fees Financial
Swap Guarantor
Counter party
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Use of Senior/subordinated Structure
Consumers
Principal &
Trustee
Interest
proceeds proceeds
Funding Trust - A
Excess Spread + AAA
Servicing Fees Senior
Swap
Counter party
BBB
Mezzanine
Equity
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Senior Subordinate Structure
l This is the most common kind of structure /credit enhancement for the
following reasons :-
– Internal credit enhancement and therefore, generally speaking, the cheapest
form of credit enhancement
– However, the ability to calculate the expected loss of each tranche and size the
required credit enhancement is imperative
– The adviser and rating agency is usually responsible for this work
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Typical Senior/Sub structure example
l As noted above, the cost of funding to the issuer is close to the interest
rate of the AAA bond
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Other types of Credit Enhancement
l Monoline Insurance
l Letters of Credit
l Reserve / Spread Account
l Cash Collateral Loan / Subordinated Loan
l Yield Supplement Account
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Rating a Transaction
Rating the transaction
l Credit risk
l Liquidity risk
l Servicer performance risk
l Swap counter-party risk
l Guarantor risk
l Legal risk
l Sovereign risk
l Interest rate and currency risks
l Prepayment risk
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How does the rating help
l Rating is an indication of the likelihood of credit losses on the securitised
assets exceeding the available credit protection to the transaction
structure
l Ratings are widely accepted by investors (and the agency must be
certified by the regulators)
– To the investor, it creates efficiency, provides pricing benchmarks
and carries highly condensed information
l Moodys, Standard and Poors and Fitch Ratings have global recognition
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Benefits of Securitisation
Benefits of Securitisation
l The three main market constituents -

l Originator – Underlying Lender / owner of asset
l Investors - Buyers
l Underlying Borrowers – Obligors
l Others are -
l Credit Enhancement Provider
l Liquidity Facility Provider
l Servicer
l Trustee
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Benefits to the Parties
Originator
1. Progressively cheaper and longer term funding
2. Diversification of funding sources
3. Timing Flexibility
4. Stable funding source
5. Improved credit risk management
6. Improved asset-liability management
7. Often improved operating efficiency
8. Increased Transparency
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Benefits to the Parties cont’
Investor
1. Opportunity to invest in a risk that is much lower than that of
the originator
2. Direct investment in the performance of the underlying asset
3. Generally, allows the investor to worry less about event risk
4. Asset Liability matching e.g. pension funds
5. Provides investors with different risk return opportunities e.g.
senior or subordinated tranches
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Benefits to Parties cont’
Underlying Borrower / Obligor

1. Cheaper, longer term funding
2. Increased flexible credit for consumers and corporations
3. Diversification of funding sources
4. Tapping into a new investor base.
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Typical Regulatory Issues
Legal and Regulatory
l Legal
l Asset Transfer
l The Special Purpose Entity or Vehicle
l Bankruptcy Remoteness
l Regulation
l Taxation
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Conditions for True Sale
l Transfer must be a true sale, or its legal equivalent. If originator is only
pledging the assets to secure a debt, then it becomes a collaterised
financing in which the originator would stay directly indebted to investor
l The assets must be owned by a special purpose entity, whose ownership
of the sold assets will in all probability survive the bankruptcy of the
originator/seller
l Actual ownership of the special purpose vehicle must be independent of
the originator
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Confirmation of a asset sale
l The treatment and form of the transaction
l The influence the seller has on the assets after the sale
l The extent and nature of benefits transferred via the sale
l The purchase price
l Notification (if necessary) to underlying borrowers when assets are sold
l Title ownership
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The Special Purpose Vehicle
l Generally set up by the originator with ownership vested in a charitable
trust
l Commonly set up in tax havens
l Mauritius
l Cayman Islands
l Jersey
l Apart from legally isolating the assets it also helps to avoid double
taxation and hence reduce the expenses (if any) of the trust
l Cost of set-up an SPV is low
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Why Bankruptcy Remote
l Only assets in the SPV are available to protect and pay investors
l No need for protection from creditors
l All obligations are limited to those available from the assets
l No recourse to the originator
l The vehicle can only receive the assets as purchased and issue
notes or certificates
l Hence, probability of Bankruptcy is remote
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Regulation
l Bank Regulators will place a strong emphasis on the the amount of
regulatory capital accorded to the transaction
l For instance, regulators in certain countries will insist that issuing bank
hold 100% Risk Weighted Capital to Equity portion of the transaction *
l This will differ from country to country and will normally be defined by
the securitisation laws of the country
l FASB 46 …? Consolidation of VIEs - Somewhat mitigated by QSPE under
FAS 140
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Current Basel II Proposals
l Strong incentive for banks to issue or invest in higher rated debt given the
penal capital weights allocable to bonds below investment grade
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SPV Taxation
l Generally speaking, the Special purpose Entities are carefully structured
to ensure that its income is offset by its expenses so that little or no tax is
incurred
l Tax incentives are however provided to special assets classes – e.g. most
countries exempt the transfer of mortgages from Stamp Duty
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Deal Structuring
Initial Deal Concept
l The structure of a transaction typically depends on the following :-

– Underlying asset class
– Investor preference
– Cost
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Underlying Asset
l The way an asset pays is strongly correlated to the liabilities created
l For example, a lease is not an interest bearing asset but it can still be
securitised
l Two things come about from securitising these assets
– Fixed rate bonds (internal or external swaps can be used to create a
floating rate note)
– Leases are sold at discount to produce the expected yield
– Generally no excess spread
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Investor Preference
l Investors have a strong influence on the deal structure by having a
preference for :-
– Tenors required
– Rating required
– Spreads required
– Prepayments
– Whether bonds are fully amortising, soft bullets, etc.
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Cost
l Issuers and their advisors will also consider the cost of one structure
against another. For example :-
– Wrapping a deal by a Monoline may be less expensive than getting a Letter of
Credit
– Overcollateralisation may prove more expensive than a senior/subordinated
structure
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Types of Securitisation Bond Structures
l Fully Amortising – principal and interest is returned to investors

throughout the life of the transaction
l Controlled or Revolving – During this period, only interest is paid to
investors. Principal payments are used to purchase additional receivables
l Sequential Pay – Multiple tranches with varying maturities where the
shortest tranche receives principal until paid off and then the next
tranche until all tranches are paid in full.
l Pro-rata – payments are made to tranches on equal terms
l Early Amortisation – Turbo pay of principal and interest in the event of
certain triggers occurring
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Analytics
Analytical Concepts commonly used
l Loan-by-loan analysis
l Cash-flow modeling
l Stratification
l Monte Carlo Simulation
l Prepayment Modeling
l CBO Analysis: S&P’s CDO Model or Moody’s Binomial Expansion
Method
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Example of Expected Loss Calculation
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Understanding the Prospectus
l Is the interest in loans perfected
l Title perfection triggers
l Set-off risk
l MIG Cover
l Basis Swap
l Compensating interest
l Definition of Interest and Principal
l Definition of Delinquencies and Charge-offs
l Any internal swap – How does it work
l Legal Nuances
l Any supplements
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Trading Platforms
Trading
l MBS/ABS generally trade Over The Counter – ‘OTC’ as in most fixed
income securities
l They trade similar to all other bonds however, the understanding of the
underlying asset and structure is crucial
l Option Adjusted Spread ‘OAS’ – the ability to price the optionality in the
bond due to step-ups etc is also crucial
l Trades are generally conducted by counter-parties using Bloomberg or
other terminals
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How does UBA Global get involved
l Structuring mandates
l Advisory mandates
l Advising and structuring credit and liquidity enhancement
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Examples of infrastructure transactions
globally
Universidad Diego Portales Chile
• 1,000,000 UF ($23 mm in inflation indexed Chilean pesos) eight-year

bond secured by UDP’s future tuition receipts and backed by a 30%
partial guarantee from IFC;
• Rated AA- by local affiliates of Moody’s, S&P, and Fitch;
• The bond, which was oversubscribed, was bought by domestic
institutional investors including pension funds, insurance companies, and
mutual funds. The issue priced tight to expectations, yielding 240 basis
points over the Chilean Treasury;
• The transaction represented the first future flow securitization in Chile,
and the first future flow for a university in Latin America.
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Partial Credit Guarantee – Bharti Mobile (India)
•Bharti Mobile, which operates cellular licenses in India, is a part of of Bharti

Enterprises, one of India’s leading telecom conglomerates.
•As Bharti’s revenues are in Indian rupee, the management placed an importance on
raising long-term rupee financing in order to best match the company’s assets and
liabilities.
•IFC offered a partial guarantee on three different tranches with tenors of five, eight,
and ten years respectively in order to reach the widest audience of investors.
•The transaction was IFC’s second partial guarantee of a bond issue in India and
opened the door for other borrowers to raise long-term local currency financing.
•Structured as three different offerings with tenors of five, eight, and 10 years
respectively;
•Total issue size of Indian Rupees 2.1 billion ($45 million);
•Rated AA+ by Indian affiliates of S&P and Moody’s;
•Placement to domestic mutual funds, banks, life insurance companies, and other
institutional investors;
•Well received by market with significant oversubscription.
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BANCO DAVIVIENDA
COLOMBIA
• UVR 1 billion ($50 million equivalent in inflation indexed Colombian

pesos) 10 year non-call five, subordinated step-up bond;
• 30% guarantee by IFC;
• Rated AA+ by local affiliate of Fitch;
• Placed within 1 day to domestic institutional investors;
• First-ever bond issue in Colombia to qualify as Tier 2 capital under the
newly issued guidelines.
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Triple A Example
• Securities: COP$ 180 billion (US$63 million equivalent) 10-year bond

issue, amortizing over last 5 years
• Guarantee: IFC Guarantee equal to greater of (i) 25% of principal or
(ii) 5 coupon payments
• Rating: 3-notch rating increase from AA- to AAA
• Other enhancements: (a) Company revenues managed by Trustee, (b)
Reserve account contributed by Sponsor
• Placement: Subscribed in 4 hours by over 15 institutional investors
• Pricing: Priced at IPC + 8.5% (120 bps > Gov.)
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Thank You
Sonnie Ayere - Biography
Mr. Sonnie Ayere
Mr. Ayere has over 14 years continuous years of solid Corporate and Structured Finance, Banking and Asset Management
experience working with HSBC, Royal Bank of Scotland (formerly, NatWest), NatWest), Sumitomo Mitsui Bank, Bank of Montreal
Nesbitt Burns in London and the International Finance Corporation
Corporatio (The World Bank Group).
n
He began his structured finance career in 1997 when he joined the the structured finance / securitization team of Sumitomo Mitsui
Bank, London. He was part of the team that structured the first ever Japanese de- de-linked Balance Sheet Collaterised Loan
Obligation securitisation – GBP1.4bn Aurora Funding. He was also responsible for managing the the bank’
bank’s fixed income portfolio
in ABS investments in other asset classes for the bank’
bank’s own balance sheet.
Following this, he joined BMO-
BMO-Nesbitt Burns (the investment banking arm of the Bank of Montreal) Montreal) London in 1998 as part of the
team responsible for setting up a US$20bn Fixed Income Structured
Structured Investment Vehicle (“ (“SIV”
SIV”), with a US$2bn Capital Note
Program which launched in 1999. He was involved in the company’ company’s set up, compiling aspects of its procedures manual,
system evaluation and testing and subsequently responsible for analyzinganalyzing and investing / trading in various ABS/MBS and
other asset classes – bank subordinated debt and other corporate debt plus the on- on-going credit monitoring of the portfolio.
He joined the Global Structured Finance Group of the International
International Finance Corporation (The World Bank Group) in Washington
DC in 2001 where he was responsible for originating structured finance finance and securitization transactions globally, notable
transactions include IFC’
IFC’s role as structuring investor in South Africa Home Loans first Residential
Residential Mortgage Backed ZAR 1bn
Offering and structuring securities backed by Contracts- -
Contracts to to-
- sale in the Philippines. Mr. Ayere assumed the role of Structured
Structured
Finance Specialist for Sub-
Sub-Saharan Africa in July 2002 and to date has been responsible for developing structured finance and
securitization transactions and developing debt capital market instruments
instruments for the bank and its clients across the continent. In
September, 2004 he also became co- co-head / sector lead for financial markets business development for for Sub-
Sub-Saharan Africa.
Here, he was responsible for generating financial market investments
investments across the region to includes US$ lines of credit to new
and existing IFC relationship banks. He pioneered IFC’ IFC’s interest in developing the Nigerian bond market and was a principal
principal
adviser to the DMO on the development of the market. He is a member member of the Nigerian Bond Steering Committee.
He joined UBA Group as Managing Director/CEO of UBA GLOBAL MARKETS, MARKETS, the combined investment banking subsidiary of
the bank group in August, 2005.
Mr. Ayere obtained an MA (Hons
(Hons.)
.) in Financial Economics from the University of Dundee – Scotland. He is an Alumni of City
University Business School London (MBA) and London Business School School (Corporate Finance Program).
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Asset Securitisation

Nigerian Electricity Regulatory Commission

UBA GLOBAL MARKETS

Illiquid Highly liquid

Assets Liabilities Sr. ABS Sell ABS Senior

Retain Residual Interest (First Loss)

l Some factors need to be in place before a securitisation can occur.

l Other factors necessary are :-

l The three main market constituents -

Underlying Borrower / Obligor

l The structure of a transaction typically depends on the following :-

l Fully Amortising – principal and interest is returned to investors

• 1,000,000 UF ($23 mm in inflation indexed Chilean pesos) eight-year

•Bharti Mobile, which operates cellular licenses in India, is a part of of Bharti

• UVR 1 billion ($50 million equivalent in inflation indexed Colombian

• Securities: COP$ 180 billion (US$63 million equivalent) 10-year bond

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