| The Impact of Structured Finance on the | | | | sceptical about foreign investment in their country |
| Ghanaian Financial Services Industry in the Next 10 | | | | and sometimes prevent the repatriation of funds |
| Years | | | | by foreigners outside. Devaluation and interest |
| A Company can issue bonds to investors secured | | | | rate just like inflation can also affect Securitisation |
| on the future profits expected to arise from part | | | | negatively especially when provision has not been |
| of its existing life business.Visit here | | | | made in the transaction deal for that. Russia is a |
| When a pool of financial assets (such as car | | | | good example. International funds are often |
| finance, home or commercial mortgages, | | | | cheaper than local ones, but given the fact that |
| corporate loans,royalties, leases, non-performing | | | | the payment to receivables is sold locally, and paid |
| receivables, and contractually pledged operating | | | | in local currency, using foreign loans creates |
| revenues) are structured and transferred to a | | | | exposure to the risk of currency depreciation. |
| 'special purpose vehicle or entity'(SPV or SPE) it is | | | | Political Risk |
| known as a Securitisation transaction. | | | | Because cross-border transactions are conducted |
| Generally, most securitisation transactions involve | | | | such that assets generate cash flows in the |
| a two tier transaction in which the originator of | | | | domestic currency while the securities backed by |
| the assets to be securitised transfers such assets | | | | those assets are denominated in foreign currency, |
| to a wholly-owned SPV.In turn the SPV transfers | | | | there is the risk that regardless of the credit |
| or pledges such assets to another entity, which | | | | strength of the underlying assets, the issuer might |
| issues rated securities in the capital markets that | | | | default on the payment. The following relevant |
| are collaterised by such assets. This second tier | | | | known political risks are identified: |
| entity can be another SPV or a multi-seller | | | | Expropriation risk: |
| commercial paper conduit and can provide funding | | | | The act of taking something from its owner for |
| by issuing medium term notes or commercial | | | | public use. This involves the act where a |
| paper. | | | | government takes over assets or accounts of |
| Types of Securitisation transaction | | | | local parties in the event of financial crisis. |
| Usually with securitisation transactions, the | | | | Nationalisation: |
| transfer of rights to assets can take one of two | | | | Transfer of business from private to state |
| main forms, true sale or synthetic securitisation. | | | | ownership. This is not usually experienced in the |
| 1. True Sale securitisation | | | | West as in South America and Africa. In relation |
| In a true Sale securitisation, the originator (for | | | | to Ghana's political situation, this is not envisaged. |
| instance a bank selling mortgages) sells the assets | | | | Convertibility risk: |
| to the Issuer. the assets are serviced by the | | | | This is the risk that in a national crisis, the |
| servicer who happens to be the Originator, with | | | | government might impose a moratorium on all |
| respect to say the mortgages sold to the | | | | foreign currency debts because of a financial crisis |
| Issuer(i.e.) and the originator continues to collect | | | | in the country. |
| the principal and interest from the borrowers on | | | | Change of law: |
| behalf of the issuer on such mortgages and see | | | | The ruling government can change the laws |
| to all default mortgages as well. | | | | overnight and this can affect a structured finance. |
| The significance of true sale is that the first-tier | | | | Sometimes for economic and political reasons, tax |
| sale of the assets from the originator to the SPV | | | | laws are enacted which might not be to the |
| is structured as a "true sale" such that the assets | | | | advantage of the originator in terms of the cost |
| are removed from the originator's bankruptcy or | | | | increase to certain elements which could increase |
| insolvency estate and cannot be recaptured by | | | | the purchase price of the product on completion |
| any trustee. Thus, the issuers are usually | | | | and can jeopardise the securitisation transaction |
| incorporated as insolvency remote entities; and | | | | which must be made cheaper if it is to succeed. |
| may not engage into any transactions other than | | | | For example an increase in the fuel tax can affect |
| those necessary to effect the securitisation what | | | | the entire transaction because tax neutrality is |
| is known as "limited purpose-concept" by which | | | | paramount to securitisation transaction. |
| virtue the SPV will not be allowed to issue any | | | | Legal & Documentation Risks |
| additional debt or enter into mergers or similar | | | | Following change of law in political risk discussed |
| transaction. | | | | above, possible legal risks to a Securitisation |
| The transactions can be conducted as conduit, | | | | transaction include inadequate legal, legislative, and |
| whereby the purchaser purchases and securitises | | | | regulatory framework on tax, financial and money |
| assets from a number of different originators. | | | | market & securities. Sometimes the case |
| This is done by through refinancing by issuing | | | | and administrative laws in the country concerned |
| commercial paper into the capital market. Banks | | | | are not developed. These issues are of great |
| usually engage in conduits by arranging | | | | concern to investors and for that matter the |
| securitisation for their clients, or standalone where | | | | originator will have to deal with this risk. |
| the purchaser only purchases assets and issues | | | | In asset-backed securities(ABS),however, the legal |
| as asset-backed securities in the context of a | | | | and documentation risks include uncertainty |
| single securitisation transaction. No commercial | | | | surrounding the transfer of assets from the seller |
| paper is issued. | | | | originator to the SPV (i.e. 'true sale') the need to |
| It must be said here that, the legal characteristics | | | | ensure that holders of ABS receive full control |
| and economic substance of the transfer will be | | | | over the underlying assets; the bankruptcy |
| the primary determining factors as whether the | | | | remoteness of the issuing SPV. |
| transaction is a true sale not a loan. | | | | This means reviewing all the covenants in relation |
| 2. Synthetic Securitisation | | | | to the separation of the SPV from the seller; the |
| In a synthetic securitisation transaction the | | | | legal roles of the trustee and servicer across all |
| originator does not sell any assets to the Issuer | | | | relevant jurisdiction including Ghana to curtail |
| and therefore does not obtain any funding or | | | | operational and execution risks associated with |
| liquidity under the transaction. The originator | | | | the payment and receipts of transactions. |
| enters into a credit swap with the issuer in | | | | Because of the changes in deal structures and |
| respect of an asset or pool of assets, | | | | considering the legal and financial framework of |
| transferring the originator's risk to the issuers. | | | | Ghana, legal and documentation risk will be very |
| Under this contract, the issuer pays the originator | | | | high. |
| an amount equal to any credit losses suffered in | | | | Regulatory Risk |
| respect of such assets or pool of assets. The | | | | The risk that originators and other lenders will not |
| Issuer's (SPV) income streams in a synthetic | | | | be treated fairly. There should be a laid down |
| transactions are the fixed amounts paid by the | | | | regulation on profit-sharing, regulations on the |
| Originator under the credit default swap and | | | | rated instruments and most importantly what |
| interest amounts received on the collateral. These | | | | structure should the SPV that issues the securities |
| transactions are typically undertaken to transfer | | | | be. |
| credit risk and to reduce regulatory capital | | | | Liability Structure Risk |
| requirements. | | | | This risk is the issues associated in which with the |
| 3. "Whole-Business" Securitisation | | | | tranching or slicing of securities brings conflicting |
| Apart from the main two forms above," whole | | | | interests which if not checked may disrupt the |
| business" securitisation is sometimes used to | | | | appropriate distribution of receivables to |
| finance a stake in private or management buy | | | | end-investors. The key to structured finance |
| out of the Originator. | | | | transaction is the payment waterfall which set the |
| This type of securitisation originated in the United | | | | covenants for paying the interests and principal |
| Kingdom. It involves the provision of a secured | | | | and allocation of losses among investors. This can |
| loan from an SPV to the relevant Originator. The | | | | be sorted with over-collateralisaton tests which |
| SPV issues bonds into the capital markets and | | | | ensure the existence of sufficient collateral in the |
| lends the proceeds to the Originator. The | | | | underlying pool of assets to cover principal |
| Originator services its obligations under the loan | | | | payments; and interest coverage test to ensure |
| through the profits generated by its business. The | | | | that there are sufficient interest proceeds to |
| Originator grants security over most of its assets | | | | cover interest payments to note holders. |
| in favour of the investors. In terms of cash flow, | | | | Levels of Risks |
| there are three most common types of | | | | Rating agencies usually would have to assess the |
| securitisation transactions: | | | | totality of the risks envisaged in each transaction |
| Collaterised Debt- this is similar to traditional | | | | before assigning a rating to the security. Thus the |
| asset-based borrowing. The debt instrument need | | | | potential for any shortfalls in receivables and the |
| not match the cash flow configure ration of any | | | | adequacy of any credit enhancement to ensure |
| of the assets pledged. | | | | that the end-investors are assigned the right level |
| Pass-Through-this is the simplest way to securitise | | | | of default risk. Cross-border transactions for |
| assets with a regular cash flow, by selling | | | | example require specific analysis regarding the |
| participation in the pool of assets i.e. an ownership | | | | potential limit that could apply to the rating of the |
| interest in the underlying assets so that principal | | | | notes because of the potential default of a |
| and interest in the underlying assets collected are | | | | government and the possible application of a |
| given to the security holders; | | | | moratorium by a government in times of crisis. |
| Pay-Through debt instrument-this is borrowing | | | | Benefits of Securitisation |
| instrument and not participation. Investors in a | | | | The use of Securitisation is not limited to one |
| pay-through bond are not direct owners of the | | | | specific asset or income flow. The application |
| underlying assets but simply investors. | | | | stretches beyond the existing bank-funding |
| One significant thing with SPV is that unlike with | | | | products and equity funding arrangements. The |
| ordinary operating companies, whose charters | | | | challenge is the approach with which a |
| typically provide for maximum flexibility, the | | | | Securitisation is considered and the ability to |
| charters of SPVs provide for the entity to have | | | | measure the impact thereof on the future of the |
| only those powers that are necessary to | | | | business. This stems from the fact that |
| accomplish the purpose of the securitisation | | | | Securitisation is cash flow driven and not |
| transaction. Thus the SPV in a securitisation will | | | | earnings-improvement driven. |
| have the power only to purchase the particular | | | | Generally, securitisation can offer the following |
| receivables contemplated by the transaction, issue | | | | benefits and we would later analyse to see |
| the related capital market securities, and make | | | | whether or not it would benefit Ghana. |
| the payments on them and so on. | | | | Efficient access to capital markets: when |
| The reason for these restrictions is thought to | | | | transactions are for example structured with |
| keep the risks of the SPV's own bankruptcy as | | | | credit ratings by a recognised credit rating agency |
| narrow as possible: the smaller the range of the | | | | on most debts, pricing is not tied to the credit |
| entity's activities, the smaller the risk of a | | | | rating of the originator. This is very significant if |
| bankruptcy. | | | | the originator is not credit worthy. |
| Securitisation is based on the underlying assets | | | | Limitation on issuer-specific's ability to raise capital |
| being securitised. Rating agencies spend a lot of | | | | is reduced: securitisations can minimise an entity's |
| time to estimate the credit risk for all underlying | | | | inability to raise capital because capital raised under |
| assets in Securitisation transaction. Other risks | | | | securitisation becomes a function of the terms, |
| considered is the prepayment risk.-the risk that a | | | | credit quality or rating, prepayment assumptions |
| portion of the assets in the underlying pool may | | | | and prevailing market conditions. |
| be repaid early. Payments and settlements in | | | | Illiquid assets are converted to cash: Securitisation |
| Ghana are considered to be good. Prepayments | | | | makes it easier to combine assets which |
| can reduce the weighted average life of the pool | | | | otherwise could not be sold on their own, to |
| and as a result expose investors to considerable | | | | create a diversified collateral pool against which |
| uncertainty over future cash flows.This can be | | | | debt can be issued. |
| mitigated by separating the payment of the | | | | Raise capital to generate additional assets: capital |
| principal and interest or the conversion of fixed | | | | can quickly be raised such as releasing long-term |
| rate returns to floating rate. | | | | capital for any allowable purposes like completing |
| Third Party Risk | | | | capital project and purchasing additional assets. |
| Collateral is not the only important factor in | | | | Match assets and liabilities to minimise risks: a |
| structured finance transaction. A servicer risk | | | | well-structured securitisation transaction could |
| would be particularly strong in Ghana. This is the | | | | create near perfect matching of term and cash |
| case that the collection of payments, distribution | | | | flow locking in an interest rate spread between |
| to investors and performance tracking will fail. | | | | that earned on the assets and that paid on the |
| Because in Ghana credit rating is not popular. | | | | debt. This means that Ghanaian business entities |
| In a Securitisation or structured finance | | | | can raise enough funds without necessarily |
| transaction, a lot of third parties are involved who | | | | providing collateral for security because of the |
| must fulfill their various responsibilities to make the | | | | transfer of risk. |
| transaction go on successfully ."Time is money", it | | | | Raise capital without prospectus-type disclosure: A |
| is said. Other third party risks include trustee | | | | conduit securitisation transaction allows one to |
| managing succession of servicing in case of | | | | raise capital without disclosure of sensitive |
| servicer default, notifying investors and rating | | | | information of any sort; in fact information is kept |
| agencies of breaches and defaults, and holding | | | | confidential. |
| cash payments to prevent servicer misuse of | | | | Complete mergers and acquisitions, & |
| cash flows; manager responsible to balance the | | | | divestitures more efficiently: Assets can be |
| competing interest within a transaction. | | | | combined or divested efficiently under |
| Financial Risks (Interest Rate Risks, Foreign | | | | Securitisation transaction. By dividing assets into |
| Exchange Rate Risks, Devaluation Risk) | | | | smaller parts against which debt is issued it can |
| Financial risks usually cover interest rates, foreign | | | | become possible to do away with other business |
| exchange rate & availability, currency and | | | | entities which are no longer profitable. |
| inflation risks. Inflation really affects the originator | | | | Transfer risk to third parties: Financial risk on loans |
| in a Securitisation transaction for reasons like | | | | and other contractual obligations by customers |
| raising the cost of the transaction which can delay | | | | can be partially transferred to investors under |
| its completion. Some governments are also | | | | securitisations. |