Basics of structuring
Par and Premium
1.
Structuring Concepts
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Structuring Basics
Pool cashflows are homogenous in nature and carry inherent risks Structuring of cashflows gives originators the flexibility to tailor instruments meeting investors requirements
Risk appetite Tenor requirements
3.
4.
Note:
Investor POS = Pool POS EIS flow every month as loan interest rate > PTC rate
5.
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
6.
Investor - Premium structure Liability sidePayouts-Premium EIS (a-b) Principal Interest Total (b) Investor POS 1,259 176 88 264 1,083 188 76 264 895 202 63 264 693 216 49 264 478 231 33 264 247 247 17 264 1,259 326 1,585 -
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
7.
Comparison Upfront amount raised: Higher in premium due to discounting of entire cash 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 internal credit enhancement reducing cash support requirement Par structures more amenable to complex structuring: due to matching of principal on asset and liability side
8.
Presentation Structure
Basics: Par and Premium Tranching concepts What is credit enhancement Optimizing credit enhancement
9.
Tranching Concepts
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
Time Tranching
Risk Tranching
Prepayment Tranching
10.
Tranching Concepts
Time Tranching:
Month 1 2 3 4 5 6 7 8 9 10 11 12 Total
Pool cash flows Class A1 Class A2 100 100 0 100 100 0 100 100 0 100 100 0 100 100 0 100 100 0 100 0 100 100 0 100 100 0 100 100 0 100 100 0 100 100 0 100 1200 600 600
6 month PTCs
Originator
SPV
Investors
11.
Tranching Concepts
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
Originator
SPV
Subordinate PTCs BBB(so)
Investors
12.
Risk Tranching
Month 1 2 3 4 5 6 7 8 9 10 11 12 Total
Pool cash Senior Junior flows PTC PTC 100 90 10 100 90 10 100 90 10 100 90 10 100 90 10 100 90 10 100 90 10 100 90 10 100 90 10 100 90 10 100 90 10 100 90 10 1200 1080 120
13.
Tranching Concepts
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
14.
Presentation Structure
Basics: Par and Premium Tranching concepts What is credit enhancement Optimizing credit enhancement
15.
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 of the securitised instruments in order to achieve the desired credit ratings
16.
A combination of the above forms of credit enhancement is normally used in a typical transaction
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Cash collateral:
The originator/ third party provides a predetermined amount of
cash, which is put into a reserve account.
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19.
Senior-subordinate multiple tranche structure, where the subordinate tranches act as a credit enhancer for the senior tranche. : For example, if Rs 150 million of assets backs Rs 100 million of PTCs, then Rs 50 million is the overcollateral in the transaction. After meeting senior payouts, balance cash is used to make payment on subordinate tranches
20.
Presentation Structure
Basics: Par and Premium Tranching concepts What is credit enhancement Optimizing credit enhancement
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Year
collections
Shortfalls 66 66 66 66 66 66 396
22.
Liability Side
Scheduled Senior cashflows payouts Shortfalls collections 264 198 238 40 264 198 238 40 264 198 238 40 264 198 238 40 264 198 238 40 264 198 238 40 238 1,585 1189 1,427
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Total
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