Structuring Concepts

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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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    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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    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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    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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    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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    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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    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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    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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    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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    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