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Equitas Securitisation The Nuts and Bolts…

Equitas Securitisation The Nuts and Bolts…. What do we want to achieve?. To establish microfinance as a high quality –low risk asset class Demonstrate a P1+rating for a micro loan backed securitization Legal form: Tradable security

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Equitas Securitisation The Nuts and Bolts…

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  1. Equitas SecuritisationThe Nuts and Bolts…

  2. What do we want to achieve? • To establish microfinance as a high quality –low risk asset class • Demonstrate a P1+rating for a micro loan backed securitization • Legal form: Tradable security • Widen sources of finance for MFIs to key capital markets investors such as mutual funds and bank treasuries • Set a new pricing benchmark for microfinance securitisations • Promote structures that are capital efficient (Par vs premium) • Establish market standards for evaluating the credit quality of micro-loan portfolios originated by MFIs

  3. Working through the cycle… Underwriting Guidelines Evaluation/Pricing Framework Rating Methodology Market Standards Investor Feedback Investor Feedback Asset Performance

  4. Capital Markets : Gaps Observed

  5. Overview of Equitas Transaction Structure

  6. Transaction Structure

  7. Equitas Transaction • Pricing Benchmark • A1 Series (P1+) based on 6 months CP at 6% • A2 Series (AA) based on 1 to 2 year PTCs and bonds issued by NBFCs of a similar rating

  8. Rating Rationale • Ratings • P1+ rating( 364 days), Ultimate rating • Credit cover for each series • Base case shortfall • Diversity of portfolio • Geographical –City wise , District wise • Minimum seasoning • Par vs. Premium transaction • Credit enhancement • Cash collateral and subordination • Incentive structures

  9. Risks Maximum default rate that can be borne without hurting IRR of any tranche 30.25% = 3% + 4% + 3*7.75% Total Prepayment Commingling Multiple * avg. Base case of Credit Risk RiskRiskRisk

  10. Waterfall Mechanism • Senior and junior tranches • Fixed / Residual yield and rights • Prepayment proceeds used for principal payments • Conditions under which cash collateral can be utilised • Waterfall • Any statutory or regulatory dues • Any over due payment • Interest due to the Series A1 notes • Interest due to the Series A2 notes • Principal due to the Series A1 notes • Principal due to Series A2 notes • If Interest and Principal on Series A1 and Series A2 notes are completely paid off then residual payment to Series A3 notes

  11. Time Tranching

  12. Capital Markets Feedback

  13. Benefits to Equitas • Lower cost of funding – could access investors in the shorter part of the yield curve and the lower rates available to short term borrowers • Opens up new investor base – mutual fund and bank treasuries • Capital release • Will be even more efficient if there was tier 2 debt • Enhanced credibility and reputation in the capital markets • Confident of issuing other debt instruments

  14. Implications for microfinance sector • New investor base- Investment by mutual fund and bank treasuries • Significantly lower cost of funds for MFIs • Microfinance is on its way to establishing itself as a high quality(P1+), low risk, mainstream asset class • Market standards firming up for evaluating the credit quality of micro-loan portfolios originated by MFIs • Enhanced transparency and disclosure via capital markets oversight • Emergence of ‘BBB’ demand • Price discovery and liquidity • For MFI’s with 1 yr loans, the portfolio can potentially be securitised to access an even shorter term, lower cost portion of the yield curve

  15. 1, Cenotaph Road | Teynampet | Chennai - 18 www.capital.ifmr.co.in

  16. Appendix

  17. But what are the Risks?

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