Financing opportunities for leasing Securitizations International Finance Corporation Financing opportunities for leasing Securitizations By Cristian Nacu Investment Officer

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

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.

Transaction ORIGINATOR $ ISSUER $ INVESTORS 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

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)

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

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

IFC’s Financial Strength IFC’s mandate is backed by: Total capital of over US$6.8 billion 175 government shareholders AAA/Aaa rating; preferred creditor status Investment portfolio of US$17 billion in 117 countries FY03 financing approved for US$5.4 billion

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.

Successful IFC securitizations Garanti Leasing – Turkey Sogeko – Korea NIIT – India SAHL – South Africa

Ex: Garanti Leasing “GL” First securitization of lease receivables in Turkey; Securitizing a portfolio of US$ and DM - denominated lease receivables originated by GL; US$10 (7) million A loan and US$50 (45) million B Loan; Fixed and floating rates with 6 years maturity; Approx. US$70 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

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 Company’s 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)

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.

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.

Thank You! IFC’s Mission in Romania Cristian Nacu Investment Officer 83, Dacia Bvd. Bucharest Tel: +4021 2010365; +4021 2010 344 Fax: +4021 2113141 E-mail: cnacu@ifc.org