Securitisation: A funding alternative for Microfinance Institutions?

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1 Securitisation: A funding alternative for Microfinance Institutions? Presentation on June 24th 2005 at the Conference New Partnerships for Innovation in Microfinance by Claudia Schneider and Harald Hüttenrauch, KfW Bankengruppe

2 Disclaimer This document is provided to you for information purposes only. This document may not be reproduced either in full or in part nor may it be passed on to another party. It constitutes neither an offer nor an invitation to subscribe or to purchase securities, nor is this document or the information contained herein meant to serve as a basis for any kind of obligation, contractual or otherwise. In all legal systems this document may only be distributed in compliance with the respective applicable law, and persons obtaining possession of this document should familiarize themselves with and adhere to the relevant applicable legal provisions. A breach of these restrictions may constitute a violation of U.S. securities law regulations or of the law applicable in other legal systems. The information contained in this document is historical and speaks only as of its date. KfW disclaims any intention or obligation to update or revise the information contained in this document. By accessing this document you acknowledge acceptance of these terms. 2

3 Introduction! Microfinance Institutions (MFIs) are in increasing need of (alternative) funding and equity sources for financing their growth! Securitisation in principle is a means of generating funding and equity Question: Is securitisation a suitable instrument for MFIs? 3

4 Securitisation in brief! Securitisation is a financing technique whereby a set of stable and predictable future cash flows ( receivables pool ) is converted into tradable securities which are sold to investors.! The payments of interest and principal on the securities, known as asset-backed securities ( ABS ) depend exclusively on the cash flow of the securitised receivables pool.! ABS investors usually have no recourse on the originating entity.! The receivables pool is sold from the originator to an insolvencyremote special purpose vehicle ( SPV ), who pays the discounted purchase price from the cash proceeds of the ABS issuance. 4

5 Basic structure of a securitisation Originator 1 Receivables Pool Sale of receivables 5 Cash proceeds 2 3 SPV ABS Issuance 4 Cash proceeds from sale of ABS Senior Mezzanine Junior 5

6 Tranching in securitisation Senior Allocation of cash flows Allocation of losses Mezzanine First Loss 6

7 Why do originators securitise? With securitisation.! Originators achieve funding based on the credit quality of their portfolio (which might be better than their own credit standing)! Originators can better leverage their capital! Originators can better manage their risk! Originators can improve their asset liability management 7

8 Securitisation in brief Loan Origination Bank Capital markets Primary market Secondary market Interactive Pricing Standardisation of products From buy and hold to active management 8

9 Securitisation in emerging markets Its shape?! Securitisation is still in its early days in emerging markets! Cross border transactions vs. domestic transactions! Residential Mortgage securitisation most important asset class What is needed for (domestic) securitisation?! Investor demand! Certain depth and diversification of local capital market! Appropriate legal and regulatory framework! Servicer rating or (rated) back-up servicer! Portfolio of standardised loan receivables! Portfolio data and historical loss information 9

10 MFIs and securitisation Microloans are appealing assets for investors:! Low default rates! High granularity! High standardisation! High diversification! Low prepayment risk! limited impact of crisis/disaster on performance -> Investor education is needed. And data on:! Historical losses and defaults! Historical prepayments! Borrower and loan data ( ) 10

11 MFIs and securitisation Which MFIs might consider a securitisation transaction?! Rated MFIs are accepted more easily as servicer, others might need a rated back-up servicer or guarantees! Primarily: non-deposit taking MFIs looking for funding alternatives! MFIs with good track record and strong MIS have advantages! located in countries with conducive legal and regulatory environment and local investor demand.! MFI should dispose on sizable loan portfolio and have strong origination power 11

12 MFIs and securitisation High cost of first transaction:! external overhead cost: lawyer, rating agency, trustee, marketing, advisor/arranger! internal overhead cost: data collection, adjustments in MIS for reporting and servicing might be needed, coordination with accountants and regulator! Risk premiums: might be higher for debut transactions, since investors still need to get comfortable with performance -> Decision for securitisation should be a strategic decision with the objective of becoming a repeat issuer 12

13 MFIs and securitisation What can be achieved?! (selected) MFIs can gain access to new funding sources! Funding in LC at longer terms can be achieved! Better leverage of MFI s capital can be achieved! MFIs can achieve growth objectives and increase outreach! Building a secondary market for microloans! On the long run: interest rates for clients can be lowered 13

14 Microloan securitisation: First Steps Wholesale models of ICICI, India SHARE Microfin Ltd Microloan pool 1 Microloan pool 2 Sale of Pool 1 & 2 (discounted) Cash ICICI Bank Sale of Pool 1 & 2 (discounted) Cash Other commercial Bank in India Funding for First Loss guaranty Grameen Foundation First Loss guaranty (Cash) 14

15 MFIs and securitisation - Securitisation of Loans to MFIs BOMS I (Closing 2004) OPIC Guaranty ABS Issuance: USD 40,9mn MFIs 9 Loans to MFIs SPV BlueOrchard Microfinance Securities I LLC Issue Proceeds Senior Notes Bolivia Cambodia Colombia Ecuador Nicaragua Peru Russia Issue Proceeds Class A Notes Class B Notes Class C Notes Equity 15

16 MFIs and securitisation What can development agencies do?! Technical assistance for data work! Finance legal studies! Support lobbying for legal and regulatory changes! Provide credit enhancement via (partial) guarantees (in LC) with improved leverage of the invested funds! Provide contacts with rating agencies and arrangers 16

17 Topics for discussion! What are the perspectives for wholesale models?! What are the perspectives for international securitisation of MFI loans (fund models)?! Pragmatic solutions for meeting data requirements?! How can MFI networks help to make securitisation happen? 17

18 Feel free to contact us " Securitisation department of KfW: o Ms. Claudia Schneider (Vice President) or o Harald Hüttenrauch (Vice President) or 18

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