Securitization and forfeiting

Transcription

1 Securitization and forfeiting

2 SECURITIZATION MARKET

3 Securitization Securitization certainly has a black mark against it, but it is far too useful to be banished for good. Almost all financial innovations, from the humble mortgage to the joint-stock company, have had to re-establish their reputations after a bust at some point in their history. Society benefited from their eventual rehabilitation as it most probably will from the revival of securitization. It s Back, The Economist, 11 th Jan 2014

4 Problems of securitization The fundamental conflicts of interest between participants Falling lending standards Achievement of high leverage in sequencing schemes, repeated sequencing (synthetic bonds, CDO s) Use of complex legal, operational, financial structures Insufficient transparency Modeling errors Low investor readiness Lack of attention to proper due diligence

5 Reforms in securitization Increasing quality of lending standards Adaptation of duties of securitization intermediaries Application of simple, transparent, easy-to-use sequencing schemes Creation of secure, transparent and low-cost environmental claims (one of the most important goals) Use of securitization for the needs of the real economy Increasing the transparency of credit rating methodologies, reducing rating shopping, reducing the use of external credit ratings for supervisory purposes Adaptation of supervisory requirements for capital adequacy Development of long-term institutional investors Europe: standardization of documentation, harmonization of loan level data, insolvency procedures and taxation TVF SDN/15/01

6 SIMPLE SST (Simple-Standard-Transparent) Traditional securitization. Synthetic and repeated issues are not suitable. Active asset management is not allowed Whole-portfolio securitization or random selection (no cherry picking); principle of real money transfer; Insolvency Claw Backs Transferable monetary claims, i.e. originated from the usual activity of the originator; legally valid and enforceable; there is no dispute between the debtor and the creditor The overdue claims ration do not exceed 90 days; the sole source of satisfaction of the claim is not the sale of the debtor's property; the debtor is not insolvent, bankrupt or restructured. Derivative financial instruments - only for interest rate and currency risk insurance There has been at least one loan payment (except for credit cards)

7 SST (Simple-Standard-Transparent) STANDARDIZATION The initiator retains a certain risk tranche of [5%]. It is the duty of investors to verify the fulfillment of this requirement ("indirect approach") in addition to the direct requirement Coupon payments associated with well-known indices, internal triggering indices and formulas are not allowed Early redemption provisions for revolving portfolios due to: i) deterioration in the credit quality of the underlying assets, ii) lack of adequate assets, iii) insolvency of the originator or servant; Consecutive redemption is maintained; assets are not liquidated Replacement of administrator or other counterparty (swap, liquidity line) in case of insolvency Investor trustee and investor decision making Requirements for administrators

8 SST (Simple-Standard-Transparent) Transparency Access to the data and documentation required for evaluation The contracts clearly set out procedures for past due, default, insolvency, restructuring, abstentions, redundancies, etc. Clearly defined cash flow allocation (CF watefall) Compulsory verification of transferable claims (representative selection) carried out outside the credit rating agency due diligence scope Track records on similar insolvency indicators, including shocks, or at least 5 years. Loan-by-loan data Not less than a quarterly report on the portfolio status Credit risk Debtor's creditworthiness assessment 2014/17 / EU, 2008/48 / EC Concentration (<1%) The borrower's classification is in accordance with the requirements of the standardized approach according to the types of loans

9 SECURITIZATION

10 Basic principle Last Loss Lowest return Loan Loan Loan Loan Loan Loan Loan Loan Loan Loan Loan Loan Loan Assets Receivables SPV Liabilities Debt Equity AAA/ AA A BBB BB/B Not rated Borrower Bank Market First Loss Highest return Investors

11 Example of securitization Dec 19, 2014 California Republic Bancorp Announces Completion of $325 Million Prime Auto Loan Securitization Transaction IRVINE, Calif.--(BUSINESS WIRE)--California Republic Bancorp ( CRB or Company ) (OTCBB: CRPB), a bank holding company for California Republic Bank ( Bank ), announced.. The securitization structure included six note classes issued by the securitization trust created by the Bank as follows: Class Amount Coupon Credit Rating (sf) (1) A-1 $ 45,500, % A-1+ /R-1(high) A-2 $ 91,000, % AAA / AAA A-3 $ 78,000, % AAA / AAA A-4 $ 80,760, % AAA / AAA B $ 18,850, % A / A C $ 10,890, % BBB / BBB $ 325,000,000 (1) Credit Ratings from Standard & Poor's and DBRS, respectively

12 What can be securitized? Any monetary claims that can reasonably be predicted from cash flows "Collateral" - means receivables that are transferred to a special purpose entity collateral - do not mix with the traditional notion of this concept! Monetary claims do not necessarily result from financial transactions Nevertheless, loans are usually cash flow claims Housing loans (MBS, RMBS); other real estate loans (CMBS) Car loans (auto ABS), consumer ABSs, credit cards ABS, leasing ABS, loan research Small and medium-sized business loans (SME ABS) Whole business securitization (mining, transport, communications, copyrights, recovery of claims, etc.)

13 Advantages of securitization (I) Financing and Risk Transfer / Sharing Facility Diversifying funding sources, which is an alternative to bank financing domination (85% in Europe) Less risk is concentrated in the banking sector Monetary requirements are transformed into instruments that best fit the business climate and the needs of investors (maturity, interest rates, credit risk) The risk is allocated among investors according to their level of risk tolerance and ability to manage this risk Reduced borrowing costs for entities with lower creditworthiness Increased competition

14 Advantages of securitization (II) Capital mobility is increasing and risk management measures are expanding The credit market available to a wider range of investors increases the transparency of the market The asset class is attractive to investors due to returns, risks and correlations with other asset classes. The securitization of monetary claims increases the amount of financial assets that can be pledged as collateral in other transactions. The push for standardization of market instruments and processes, lower costs, and more efficient financial sector Securitization before the crisis has been successful for 30 years

15 Participants of securitization transaction Borrower Swap counterparty Credit Enhancer Liquidity Provider Rating Agency Originator Arranger Legal Advisor SPV Trustee Auditor Warehouse Lender Servicer Asset Manager Underwriter Master Servicer Custodian Investor

16 Rating agencies insights Many companies in emerging markets, including banks, non-bank lenders, leasing companies and other originators of securitizable assets, do not yet have access to securitization as a financing tool. This is due to a number of factors, including legal and regulatory infrastructures that are not yet conducive and asset pools that are not sufficiently developed However, it is rating agencies opinion that these will not be permanent barriers. Experience in Latin America, Asia and South Africa demonstrates that securitization can become a viable and beneficial financing tool in emerging markets Global experience suggests that the initial securitization can be a difficult process for asset originators Securitization is information intensive and requires a company be able to communicate clearly the nature of its assets and quantify asset performance in very specific ways

17 Due diligence scope (I) Collateral analysis (data on pool of assets): Delinquencies Defaults Recoveries Prepayments Identifying characteristics: diversification of obligors, including creditworthiness as defined by internal or external risk rating systems, geographical location and asset types Structure of receivables, including original amount and term, interest rate, outstanding balance and remaining term

18 Due diligence scope (II) Collateral analysis (data on pool of assets): Originator/Servicer review policies and procedures by which the assets are originated An operational track record and stable ownership structure. Managers with backgrounds and experience that demonstrate an understanding of their business area. A rational organisational structure that demonstrates depth of management skill. A comprehensive set of human resource and employee training practices. A suitable management information system ( MIS ) in key operational areas. A corporate strategy that is ingrained in current corporate practices and forms a basis for future growth. A track record of financial strength and a clear strategy for meeting financing needs. An understandable and realistic motivation for securitisation. Availability of back-up servicer

19 Due diligence scope (III) Legal Structure and Documentation Review transferability of assets; bankruptcy remoteness of the issuer; security interest over the assets; Taxation: transfer tax, stamp duty and withholding tax; Regulatory issues Set-off risk The legal ability to transfer assets and attached security to a third party. The requirement in some jurisdictions to notify underlying obligors in writing of the transfer of assets and to receive confirmation from the obligor The existence and reliability of special purpose vehicle ( SPV ), bankruptcy and foreclosure legislation. The potential impact of consumer and data protection laws. Sovereign Risk Evaluation Cash flow analysis and Financial Structure

20 Due diligence scope (IV) Credit Origination and Monitoring Procedures Clearly documented and implemented credit underwriting and origination policies and procedures and delegated authorities. Clear policies and procedures for valuation of collateral, accurate completion of registration of collateral and on-going monitoring of collateral interests. Standardised and comprehensive legal contracts and accuracy in completion of contract documentation. Comprehensive documentation management, including clear instructions on the documentation needed for a transaction and well organised filing systems. Vigorous monitoring, collection and problem asset policies and procedures. Concise and uniformly implemented provisioning and write-off policies. Comprehensive management information reporting systems that distribute key management information on a timely basis.

21 Due diligence scope (V) Operational Risk Procedures File structure, maintenance, storage methods and access controls structured to reduce operational risks Adequate computer systems to provide information to management on a real time basis Regular back-up and storage of key data. Access controls on key systems Internal and external audit policies, quality control procedures and anti-fraud measures Established and tested disaster recovery and emergency planning

22 Rating agencies stresses Securitization is a unique long-term financing tool that requires real commitment on the part of a company to develop internal capacity to support the process. Rating agencies will look for the originator to demonstrate: a solid performance track record for an asset pool; ability to service the assets concerned; ability in the case of revolving or future flow transactions to continue to originate the assets. Two key areas that in rating agencies experience cause challenges to securitization in emerging markets: credit originating and servicing policies and procedures availability of reliable and standardized data. In rating agencies experience, companies that bring their information systems inline with the data requirements of securitization find that on-going securitizations are more efficient To facilitate this process, rating agencies encourages originators and arrangers to approach the agency early in the development of a transaction. In this way, it may be able to aid the rating process by identifying potential barriers, allowing the originator time to address them.

23 Importance of track record Rating agencies generally looks for a minimum of three to five years of historical data before it can draw meaningful default, recovery and prepayment assumptions Ultimately, it is possible to structure a transaction with less data; however, this comes at a cost to the originator The less data available, the more conservative the agency s default probability and realized loss assumptions, potentially making it more difficult for transactions to achieve their target ratings The better the quality and quantity of performance data available, the better able the agency is to refine the credit enhancement levels, usually to the benefit of the originator

24 Some conclusions Securitization is an effective borrowing and risk transfer / sharing mechanism Securitization is a financial instrument established in mature markets and it is given a special high level political attention (EU Capital Market Union) VIPA projects are potentially very attractive for securitization Lithuania's experience, as in most of Eastern Europe and the Nordic countries, is limited A particularly beneficial environment for financing energy efficiency projects: the low interest rate environment and green initiatives There are background allowing to use of the securitization instrument in Lithuania although Lithuanian legal framework is not fully allow to use securitization in full extent

25 Examples

26 Examples

27 VIPA SECURITIZATION INITIATIVE

28 VIPA SECURITIZATION INITIATIVE The financial flows received for renovation of multi-apartment houses are a proper object for securitization VIPA may issue green bonds on the basis of financial lows of the multi-apartment house portfolios DNMF INVESTORS Receivables Reflows SPV Debt securities

29 VIPA SECURITIZATION INITIATIVE In 2015, VIPA considered a possibility to apply and implement with respect to the energy efficiency projects one of the most popular financial instrument securitization. In the beginning of 2016 the Company was continuing the negotiations with th strategic partner EBRD regarding mezzanine and the participation in the securitsation transaction. EBRD submitted a proposal for the transaction (Pre-financing Agreement and Feasibility study Terms of Reference). TRANSFER OF THE LOANS TO INVESTORS USING SECURITIZATION WOULD ALLOW: DECREASE THE return required by investors (discount rate) thus increasing the price of the financial assets being sold ATTRACT larger private capital resources Achieve larger multiplier of the programme Achieve higher leverage indicator Synergy for other programmes Regional leadership, strengthening of the institutional authority, preconditions for more constructive partnership

30 SECURITIZATION INITIATIVE Securitization initiative launched in the end of 2015 Discussion on securitization initiative resulted Extension of EBRD loan to MABR Project (EBRD signed agreement with MoF) on capital market legal framework harmonization VIPA has made assessment of the deal structure, environment, requirements and other conditions is performed VIPA self-assessment is performed (139 actions identified and under implementation) Steps taken to deal with challenges associated with handling personal data and improving administration of the loans

31 FORFEITING FACILITY

32 Forfeiting facility Source: LABEEF

33 THANK YOU FOR ATENTTION! CONTACTS Justinas Bucys Head of investment and development division Tel. (+370) Mobile (+370) j.bucys@vipa.lt Kristina Vaskelienė Deputy Chief Executive Officer Kristina Vaskelienė (8 5) k.vaskeliene@vipa.lt

34