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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 Httenrauch, KfW Bankengruppe

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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

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Disclaimer

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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?

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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 insolvency-

remote special purpose vehicle (“SPV”), who pays the discounted purchase price from the cash proceeds of the ABS issuance.

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Basic structure of a securitisation

Originator

SPV

Senior Receivables Pool Junior Mezzanine

Sale of receivables Cash proceeds ABS Issuance Cash proceeds from sale of ABS

1 2 3 4 5

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Tranching in securitisation

Senior Mezzanine First Loss Allocation of losses Allocation

f cash flows

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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

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8 Loan Loan Origination igination Bank ank Ca Capit pital markets markets

Securitisation in brief

Primary market Secondary market

Interactive Pricing Standardisation of products From „buy and hold“ to active management

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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

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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 (…)

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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

rigination power

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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
bjective of becoming a repeat issuer

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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

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Microloan securitisation: First Steps

Sale of Pool 1 & 2 (discounted) Cash SHARE Microfin Ltd Grameen Foundation Microloan pool 1 Microloan pool 2

ICICI Bank

Cash Sale of Pool 1 & 2 (discounted)

Other commercial Bank in India

First Loss guaranty (Cash)

Funding for First Loss guaranty

Wholesale models of ICICI, India

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MFIs and securitisation

Securitisation of Loans to MFIs

Class C Notes Class B Notes Class A Notes

SPV

BlueOrchard Microfinance Securities I LLC

Senior Notes Equity OPIC Guaranty

MFIs

9 Loans to MFIs Bolivia Cambodia Colombia Ecuador Nicaragua Peru Russia Issue Proceeds Issue Proceeds

BOMS I (Closing 2004)

ABS Issuance: USD 40,9mn

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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

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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?

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Feel free to contact us

" Securitisation department of KfW:

Ms. Claudia Schneider (Vice President)

+49 69 7431-3945 or Claudia.Schneider@kfw.de

Harald Hüttenrauch (Vice President)