Financing opportunities for leasing Securitizations

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Financing opportunities for leasingSecuritization
s
International Finance Corporation

• By Cristian Nacu
• Investment Officer

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What is securitization?

• A form of structured finance
• Started in early 70s with the sale of pooled
  mortgage loans guaranteed by government agencies.
• Any current or future cash flow that is generated
  by assets can be securitized
• mortgage loans,
• auto loans,
• credit card receivables
• equipment leases
• record album receivables (David Bowie and
  Pavarotti).
• lottery winnings
• unsold airline tickets

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Players in a Securitization

• Involves three parties Originator, Issuer (SPE),
  and Investors
• The Originator who initially created the
  receivables is packaging a pool of receivables
• The Issuer (SPE) purchaser of the pool and
  issuer of the asset-backed securities (ABS)
• The Investors purchasers of the ABS
• Other parties Intermediaries, Trustee, Brokers,
  Custodian, Rating Agencies, Servicer, etc.

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Transaction

• Step 1. The Originator is booking the assets
  which will create receivables.
• Step 2. The Originator packages the receivables
  and sells them to the issuer - a bankruptcy
  remote SPE.
• Step 3. ABS are issued backed by the cash flows
  of the loans themselves and, typically, the
  underlying assets. The ABS are also supported by
  various forms of credit enhancement.

ORIGINATOR
True sale

ISSUER
ABS

INVESTORS
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Advantages for the Originator

• Immediate access to cash
• Diversification for funding sources
• Potentially lower cost of funding
• Ability of financially weak or small market
  players to access funding
• Assets liability matching
• Risk Transfer
• Developmental role (emerging markets)

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Credit enhancement (required in every
Securitization)

• Intended to reduce the risks to the Investors and
  thereby increase the rating of the Securities and
  lower the costs to the Originator
• Typical forms of credit enhancement are
• Over-collateralization
• Senior/subordinated structure
• Early amortization
• Cash collateral account
• Reserve fund
• Security bond
• Liquidity provider
• Letter of credit

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Lease securitizations

• An increasing proportion of the total ABS market.
• Depends on legal, tax, accounting and regulatory
  framework
• Issues ownership, service, retitling and
  reregistering (in the case of leased vehicles)
• Unsecured loans

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IFCs Financial Strength

• IFCs mandate is backed by
• Total capital of over US6.8 billion
• 175 government shareholders
• AAA/Aaa rating preferred creditor status
• Investment portfolio of US17 billion in 117
  countries
• FY03 financing approved for US5.4 billion

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How does IFC get involved with securitization?

• Advisory Assignments
• review the local legal and regulatory framework
  and evaluate its suitability for securitization
• help with the preparation or amendment of local
  securitization laws
• determine whether securitization is a viable
  funding strategy for the sponsor.
• Structuring Mandates
• provides structuring expertise
• helps the client to prepare and analyze the
  required portfolio data
• guides the client through the structuring
  process, including price negotiations, rating
  reviews, deal documentation and securities
  placement.
• Investing and Credit Enhancement Capacity
• invests primarily in domestic securitizations
• makes funded and unfunded investments in rated
  subordinate tranches, both in local and foreign
  currency
• IFC can also provide liquidity support, currency
  and interest rate swaps, and warehousing
  facilities to build up specific asset pools for
  later securitization.

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Successful IFC securitizations

• Garanti Leasing Turkey
• Sogeko Korea
• NIIT India
• SAHL South Africa

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Ex Garanti Leasing GL

• First securitization of lease receivables in
  Turkey
• Securitizing a portfolio of US and DM -
  denominated lease receivables originated by GL
• US10 (7) million A loan and US50 (45) million B
  Loan
• Fixed and floating rates with 6 years maturity
• Approx. US70 million lease receivables have been
  assigned on a true sale basis (30 over
  collateralization) to IFC
• GL retained a subordinated residual interest in
  the Receivables, in the amount of the over
  collateralization
• IFC sold the participation in the B loan to a
  SPE
• The SPE issued fixed and floating-rate notes
  through a private placement with eligible
  European investors

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Garanti Leasing GL (cont.)

• The receivables covered a wide variety of lease
  receivables for textile equipment, printing
  equipment, computer equipment, medical equipment
  and embroidery equipment, etc.
• Sponsor support GL increased its share capital
  and rolled over a significant amount of loans.
• Covenants designed to ensure (i) that the
  proceeds of the securitization were used to
  improve the Companys financial situation and
  (ii) the continuance of GL as a sound
  institution.
• Additional credit enhancement in the form of a
  liquidity reserve fund (of approximately 4
  percent of the Receivables)

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Not so bright side of Securitization (when used
primarily because of the accounting results)

• Shrinking the Balance Sheet - appear smaller than
  they really are.
• Bank Capital Regulations - reduce their
  regulatory capital requirements.
• Gains-on-Sale - make their earnings seem stronger
  than they really are.
• Complexity - making its financial structure so
  complicated that it defied reasonable attempts at
  analysis.
• Bankruptcy - place its securitized assets beyond
  the reach of the bankruptcy system, which,
  arguably, might be unfair to its other creditors.

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10 reasons as to why the Titanic was actually a
securitization instrument (Vinod Kothari)

• 1) The downside was not immediately apparent.
• 2) It went underwater rapidly despite assurances
  it was unsinkable.
• 3) Only a few wealthy people got out in time.
• 4) The structure appeared iron-clad.
• 5) Nobody really understood the risk.
• 6) The disaster happened overnight London time.
• 7) Nobody spent any time monitoring the risk.
• 8) People spent a lot trying to lift it out of
  the water.
• 9) People who actually made money were not in
  original deal.
• 10) Despite the disaster, people still went on
  other ships.

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Thank You!

• IFCs Mission in Romania
• Cristian Nacu
• Investment Officer
• 83, Dacia Bvd.
• Bucharest
• Tel [phone] 2010 344
• Fax [phone]
• E-mail cnacu_at_ifc.org