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Credit Enhancements for RMBS Summit on Brazilian ABS Conference

Credit Enhancements for RMBS Summit on Brazilian ABS Conference Laila Nordine, International Finance Corporation October 25th, 2007. General Structure of an RMBS. Originator. Rating Agencies. Servicer. Credit Enhancer. Arranger/ Placement Agent. Trustee. Waterfall Example.

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Credit Enhancements for RMBS Summit on Brazilian ABS Conference

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  1. Credit Enhancements for RMBS Summit on Brazilian ABS Conference Laila Nordine, International Finance Corporation October 25th, 2007

  2. General Structure of an RMBS Originator Rating Agencies Servicer Credit Enhancer Arranger/ Placement Agent Trustee

  3. Waterfall Example Monthly payments Monthly payments Homeowners Trustee Servicer Servicer + Trustee + Guarantee Fee + insurance Fee Interest to senior Notes Interest to Mezzanine Notes Principal to Senior Notes Principal to Mezzanine Notes Credit enhancement mechanisms First Loss / Equity Holder

  4. Available forms of Credit Enhancement • Internal Credit Enhancements • Over Collateralization (O/C) = Mortgages or Receivables sold below Par • Excess Spread = Yield on Mortgages higher than all-in cost of structure • Turbo feature = using excess spread to pay down notes or quotas faster • Junior Tranche = Liabilities or Quotas exceed Par Value of mortgage portfolio • External Credit Enhancements • Partial Guarantee on Performance of Assets • Mezzanine Tranche or Quotas • Full Wrap • Mortgage insurance

  5. Advantages and challenges of each option • Internal Credit Enhancements • O/C • (-) No immediate recognition of value of Mortgage Yields • (+) may be cheaper option for originator • Excess Spread • (-) Can be hurt by defaults and prepayments • (+) helps ensure good servicing • Turbo feature • (-) Junior Quota holder has to wait too long to get Cashflows • (+) help reduce the WAL of Senior quotas hence more favourable pricing • Junior Tranche • (-) Impact on Regulatory and Economic Capital, consolidation risk • (+) Helps Originator benefit from upside of portfolio performance

  6. Advantages and Challenges of each option • External Credit Enhancements • Partial Guarantee on Performance of Assets • (-) Additional party at the negotiations table • (+) Another pair of eyes that analyses the transaction • Mezzanine Tranche or Quotas • (-) can be harder to place if buyer not identified at the beginning • (+) can enhance all in cost of the transaction • Full Wrap • (-) too much reliance on wrapper as Investors taking credit risk of the wrapper only not on portfolio (LT funding?) • (+) sometimes more cost efficient or easier to place • Mortgage insurance • (-) may need to re-underwrite the whole portfolio, not always a portfolio solution • (+) First Loss provider for each loan

  7. Structuring Considerations • Gauging of market appetite and target rating • All in cost of funding for originator • Legal and regulatory hurdles • Sustainable Long Term funding objectives of originator

  8. External credit Enhancer Role • As a subordinated risk taker, Credit Enhancer may • be fully involved in the structuring of the issuance • Perform its own due diligence and appraisal • Perform its own modeling and risk analysis of the structure • Use market comparables for pricing • Participate in the investors road shows

  9. Credit Enhancer Due Diligence • Analysis of the market and of the client’s market share. • Analysis of its expected growth. • Analysis of the origination strategy, Credit and Collection Policies and/or of the credit scoring system • Analysis of the Securitized portfolio. • Performance of the existing portfolio: prepayments, delinquency numbers, defaults, recoveries, net losses.

  10. Mexico – GMAC MBS IFC entered the MBS market in Mexico with an innovative enhancement structure. As a credit enhancer, IFC contributed not only to the successful placement of the senior notes but also the development of domestic capital markets in Mexico as a sustainable long term source of financing to the housing sector in Mexico.

  11. GMAC FinancieraStructure

  12. Best Local Market Securitization Colombia – Titularizadora NPL This transaction was the first securitization of non-performing loans in Latin America. As a credit enhancer, IFC contributed not only to the development of domestic capital markets by helping to introduce a new asset class, but also as a catalyst to expedite the recovery of the banking sector. Titularizadora’s first NPL securitization has already been replicated in a second transaction similar in structure but with non-performing mortgages from three originating banks.

  13. Investors Ratings Regulatory IFC Arrangers Legal Issuers IFC Structured Finance Value-added in transactions Act as lead investor and participate in road show Global expertise on EM rating process Leverage and coordination with regulators Provide advice to client during selection process of arranger, and work closely with arranger on the transaction In-house expertise Extensive due-diligence brings credibility, as well as ongoing supervision

  14. Structured Finance at IFC • Completed 84 transactions in 26 different countries • Mobilized a total of US$8bn (US$2.5bn during FY07) with IFC’s credit exposure of only US$1.3bn (US$318mn during FY07) • Global (4) • Rural Impulse Fund (E) • GMF (E) • Santiago Global EM CDO (C) • Southern Europe and Central Asia (3 deals) • CoopEst (E) • EFSE (E) • Central and Eastern Europe (10 deals) • JSC Vneshtorgbank (C) • Russian Standard Bank (B) • Russian Standard Bank (C) • Rusfinance Bank (B) • ROOF Russia S.A. (C) • Chuvash Republic (B) • OTP Facility (E) • BalAEF (C) • Latin America and Caribbean (36 deals) • Titulizadora Colombiana (A) • Irapuato (B) • DUOC Foundacion (E) • Municipality of Guatemala (B) • USMP (B) • GMAC CEF (A) • Compartamos (B) • GMAC Su Casita (A) • Interbolsa (B) • Rio Bravo Sec. (G) • Banco Real II (F) • Drokasa (A) • Exportadores II (A) • UBB (D) • Triple A (B) • Banco Davivienda (B) • Municipality of Tlalnepantla (B) • Diego Portales (A) • Banco BBA (D) • Middle East and North Africa (11 deals) • IOBM (B) • Al Amana (B) • KIC (C) • MicroFund for Women (B) • MLA (G) • FONDEP (B) • Packages RI (B) • Saudi Orix Leasing (B) • East Asia and Pacific (9 deals) • Sampoerna (E) • CHUEE (E) • Wilmar-PGA (D) • NISP Bussan (E) • TelecomAsia (B) • KoMoCo (A) • Emerging Asia CBO(C) (A) Local currency securitization (B) Local currency partial guarantee (C) Cross-border securitization (D) Cross-border partial guarantee (E) Risk Participation Facility (F) Structured Credit Line (G) Sovereign-linked guarantee • Sub-Saharan Africa (8 deals) • K-Rep Bank (E) • TTB (E) • Municipality of Buffalo City (B) • IDA RSF BNI (E) • IDA RSF BFV (E) • CoJ (B) • SAHL (A) • South Asia (2 deals) • Bharti Mobile (B) • Ballarpur Industries (B)

  15. IFC-Structured Finance Brazil Contact: Lee Meddin (+1 202 473 3992; lmeddin@ifc.org) Laila Nordine (+1 202 473 1226; lnordine@ifc.org) Rogerio Pilotto (+55 11 5185 6895; rpilotto@ifc.org) WWW.IFC.ORG/STRUCTUREDFINANCE

  16. www.ifc.org/structuredfinance

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