Botswana Stock Exchange

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Botswana Stock Exchange

  1. 1. SECURITIZATION- A Financial Perspective for Botswana Markets Thapelo Tsheole Product Development Manager Gaborone, 9 th May 2007
  2. 2. Structure of Presentation <ul><li>Background </li></ul><ul><li>Securitisation </li></ul><ul><li>BSE Listing Requirements (ABS) </li></ul>
  3. 3. Botswana Stock Exchange (BSE) <ul><li>Established by statute in 1994, prior to which Stockbrokers Botswana acted as the informal share market since 1989 </li></ul><ul><li>31 companies listed – 19 domestic and 12 dual listings </li></ul><ul><li>25 Bonds listed (Commercial, corporate and govt. </li></ul><ul><li>Market Capitalisation – P29.9 billion domestic, P561.2 billion Foreign & P4 billion Bonds </li></ul>
  4. 4. <ul><li>BUT Liquidity is extremely low </li></ul><ul><li>- Lack of instruments to draw out liquidity </li></ul><ul><li>- Narrow depth and breadth of market </li></ul><ul><li>Currently BSE is almost solely focused on equities </li></ul><ul><li>In the future – we intend to offer more than pure equity products. </li></ul><ul><li>BSE will encourage innovative products to allow the market to develop </li></ul><ul><li>One of products is Securitized products to unlock liquidity </li></ul>
  5. 5. Role of BSE in Innovative Products <ul><li>Help banks/ financial institutions turn cash faster – increase velocity of assets, make asset management system efficient </li></ul><ul><li>Make institutions generate money </li></ul><ul><li>Give investors more opportunities </li></ul>
  6. 6. What is Securitization? <ul><li>Repackaging of Assets </li></ul><ul><li>- Income or other receivables from assets( </li></ul><ul><li>the collateral pool) is sold to bond </li></ul><ul><li>investors </li></ul><ul><li>- Bond investors are exposed to the credit risk of the </li></ul><ul><li>Assets not of the Originator </li></ul><ul><li>Turns assets into marketable securities </li></ul>
  7. 7. <ul><li>Any asset that generates cash flows can be securitized </li></ul><ul><li>Securitization provides ‘cheap” finance by turning often illiquid and undervalued assets into tradable capital market instruments </li></ul><ul><li>Companies with strong tangible assets backed by a well documented track record and mature demand are obvious candidates for securitization </li></ul>
  8. 8. In a securitization 3 things must happen: <ul><li>A pool of assets is sold in a “true sale” to a remote Special Purpose Vehicle (SPV) </li></ul><ul><li>The SPV issues debt, backed by the asset itself and the payment streams associated with it (asset-backed) </li></ul><ul><li>Repayment of debt comes from the cash flow generated by the asset pool rather than the company’s cash flows </li></ul>
  9. 9. Securitization Diagram SPV Originator INVESTORS True Asset sale Sale proceeds Sale proceeds of securities Interest & principal
  10. 10. The Collateral Pool <ul><li>A pool of credit risk either: </li></ul><ul><li>1. Cash Assets </li></ul><ul><li>- Loans </li></ul><ul><li>- Mortgages </li></ul><ul><li>- Credit card receivables </li></ul><ul><li>- Auto card receivables </li></ul><ul><li>- Asset backed securities </li></ul><ul><li>- Phone/electricity account receivables </li></ul>
  11. 11. Why securitize? <ul><li>1. Efficient use of Capital </li></ul><ul><li>Release capital through the transfer of assets </li></ul><ul><li>to a non-consolidated legal entity </li></ul><ul><li>- where the risks of an assets are fully </li></ul><ul><li>transferred to investors </li></ul><ul><li>- Also the seller retains no residual credit </li></ul><ul><li>exposure to the assets </li></ul><ul><li>- The assets move off balance sheet </li></ul>
  12. 12. <ul><li>2. Optimal Funding </li></ul><ul><li>Securitization can be simply an efficient </li></ul><ul><li>funding exercise </li></ul><ul><li>- some major banks became active in </li></ul><ul><li>securitization at a time when their own credit </li></ul><ul><li>rating was lower </li></ul><ul><li>- When they (Banks) securitized things like </li></ul><ul><li>credit cards balances and the sale of credit </li></ul><ul><li>card receivables were sold to SPV it allowed </li></ul><ul><li>these receivables to be funded by the issue of </li></ul><ul><li>securities rated much higher </li></ul>
  13. 13. <ul><li>3. Liquidity </li></ul><ul><li>Through securitization banks/companies are able to add substantial liquidity to their balance sheet </li></ul><ul><li>- raise funds without ballooning the </li></ul><ul><li>balance sheet – generate cash by selling a pool </li></ul><ul><li>of cash flows </li></ul><ul><li>- raise money from good debts </li></ul><ul><li>- tap a new investor market </li></ul><ul><li>- improve profitability </li></ul>
  14. 14. <ul><li>4. Credit Risk Hedge </li></ul><ul><li>Credit risk of the assets can be transferred to the bondholders </li></ul><ul><li>- However, seller often retain first loss </li></ul><ul><li>position </li></ul><ul><li>- There are also reputational risks in the </li></ul><ul><li>transfer of poor quality assets to </li></ul><ul><li>investors </li></ul><ul><li>- Negative selection of assets should be </li></ul><ul><li>avoided </li></ul>
  15. 15. Role of Seller/Originator <ul><li>The party selling assets, cash flows or an interest in assets or cash flows </li></ul><ul><li>The seller can be the same as the originator (original lender) or it can be a dealer or mortgage wholesaler </li></ul><ul><li>Seller is the driving force behind the transaction </li></ul><ul><li>There can be a servicer, who manages the assets, collect payments, perfection of security on secured loans/mortgages. Assumes management role </li></ul>
  16. 16. Role of SPV <ul><li>Purchases asset from Seller </li></ul><ul><li>Issues securities to investors </li></ul><ul><li>Holds assets “Bankruptcy Remote” from the Seller </li></ul><ul><li>Independent from the seller, different name, different shareholders, not consolidated </li></ul><ul><li>Interested parties generally agree that they will not file for bankruptcy in respect of the SPV </li></ul>
  17. 17. BSE Listing Requirements (ABS) <ul><li>BSE should be consulted at early stages due to complex nature of asset backed securities transactions </li></ul><ul><li>Where issue of Asset- backed fin. Instru is backed by equity securities, those securities must be exchange listed or traded on another regulated & regularly operating open market </li></ul><ul><li>Those securities must represent minority interests and NOT confer legal management control of the issuing companies </li></ul><ul><li>Audited A/c (14.73) </li></ul><ul><li>Trustee or other appropriate independent party representing interests of holders of ABS, with right of access to appr. Inform relating to the assets </li></ul>
  18. 18. THANK YOU

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