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    • THE STUDY ON SUCCESS AND PROSPECTS OF ASSETBACKED SECURITIZATION IN CORPORATE SECTOR OF PAKISTAN A thesis Presented to the Faculty of Management Sciences Bahria Institute of Management and Computer Sciences, Karachi In Partial fulfillment Of the Requirements for the Degree Master in Business Administration By NAJMUS SAQIB FEBRUARY 07, 2005
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan TABLE OF CONTENTSABSTRACT……………………………………………………..…………………...01CHAPTER NO.1 PROBLEM AND ITS BACKGROUND1.1 Introduction…………………………………………………………………..03 1.1.1 Asset Backed Securitization Market in Pakistan……………………..041.2 Statement of the Problem…………………………………………………….051.3 Significance of the Study…………………………………………………….061.4 Scope of the Study……………………………………………………………061.5 Delimitations…………………..……………………………………………..071.6 Definitions……………………………………………………………………07CHAPTER NO: 2 RESEARCH METHODOLOGY AND PROCEDURES2.1 Research Design……………………………………………………………..11 2.1.1 Purpose of the Study…………………………………………………11 2.1.2 Types of the Investigation……………………………………………11 2.1.3 Study Settings………………………………………………………...11 2.1.4 Researcher’s Interference…………………………………………….11 2.1.5 Time Horizon………………………………………………………...112.2 Respondents of the Study…………………………………………………….112.3 Instruments……………………………………………………………….......122.4 Treatment of the Data………………………………………………………...122.5 Presentation Analysis………………………………………………………...12CHAPTER NO 3: REVIEW OF LITERATURE & STUDIES3.1 Features of Asset Backed Securitization…………………………………….14 3.1.1 Marketability…………………………..………………………………14 3.1.2 Merchantable Quality………………………………………………….15 3.1.3 Wide Distribution……………………………………………………...15 3.1.4 Homogeneity………………………………..…………………………15 3.1.5 Special Purpose Vehicle……………………………………………….16Project Thesis 2
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan 3.1.6 Assets that can be Securitized………………………………………….163.2 Mechanism of Asset Backed Securitization & its beneficiaries……………..17 3.2.1 Process of Asset Backed Securitization………………………………..17 3.2.2 Why Do Issuers Need Securitization…………………………………..18 3.2.3 Why Do Investors Invest In Asset-Backed Securities…………………19 3.2.4 Impact of Asset-Backed Securitization on Capital Market……………20 3.2.5 Motivations in Future Flow Securitization……………………….……20 3.2.6 Managing Risks In Future Flows………………………………………213.3 Asset Backed Securitization in Pakistan……………………………………...22 3.3.1 Setting Up……………………………………………………………...23 3.3.2 Registration Issues……………………………………………………..23 3.3.3 Operations………………………………...……………………………24 3.3.4 Prohibitions…………………………………………………………….25 3.3.5 Problems……………………………………………………………….26 3.3.6 Hurdles & Initiatives…………………………………………………..26CHAPTER NO 4: PRESENTATION ANALYSIS4.1 Market Overview……………………………………………………………….29 4.1.1 Paktel Limited………………………………………………………..30 4.1.2 World Call Payphones Limited………………………………………32 4.1.3 Pakistan Telecommunication Ltd…………………………………….33 4.1.4 Pakistan Industrial Leasing Corporation……………………………..36 4.1.5 Associated Constructors Limited…………………………………….38 4.1.6 Orient Petroleum Inc. – Pakistan Branch…………………………….40 4.1.7 Pakistan International Airlines……………………………………….424.2 Fitch Rating For Pakistani Environment for Securitization……………………424.3 Summary of Asset Backed Securitization in Pakistan…………………………44CHAPTER NO 5: SUMMARY OF FINDINGS AND CONCLUSION5.1 Summary of Findings………………………………………………………...475.2 Conclusion…………………………………………………………………....495.3 Recommendations……………………………………………………………50REFERENCES AND BIBLIOGRAPHY………………………………………….51Project Thesis 3
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan ABSTRACTThis study analyzes and explores the existing status of Asset Backed Securitization inPakistan, its development and application in various business sectors, its importance andsignificance for the corporate sector in Pakistan. It also covers the information about theexisting operational scenario for the asset backed securitization in Pakistan including thechallenges faced by corporate sectors and the future scope of the asset backedsecuritization in the potential sectors of Pakistan for the economical growth. In Pakistan,the Asset Backed Securitization involves the future flows of receivables of thecompanies. The development of a viable securitization market is extremely dependentupon the legal and regulatory framework that is in place to provide adequate protectionfor investors. The development of a thriving securitization environment in Pakistan is noexception. There is a part series that will review securitization deals in Pakistan. In thissection the regulatory framework that permits securitization to take place will beanalyzed. The mechanism of asset backed securitization has been studied, the benefits ofsecuritization process to the investors, companies and all other associates and the impactof the asset backed securities on the capital markets in Pakistan. Moreover it alsodiscusses the risk faced by the parties in the securitization process and how these riskscan be managed. After all detailed description of the Asset Backed Securitization inPakistan there has been made a significant study on the various business sectors of thecountry where the asset backed securitization has been implemented, their facts andfigures regarding the transaction summary; profitability and the amount of securitieshave been studied. In the end there is a market overview of the asset backedsecuritization in Pakistan, its future prospects in the country and the potential sectorswhere the asset backed securitization can be implemented to achieve effectiveness. In thelast there is a detail of the findings of the research which answers all the questions of theresearch. In findings it is encouraging to mention that there is a strong potential for thegrowth of asset backed securitization in Pakistan, and the deals have been successfullybeen carried out. Moreover the businesses are growing in the country, the investors’confidence has been regained and the foreign investors are attractive to invest in Pakistanwhich can be analyzed from the rising trend in the capital market indicators as the stockexchange index crossed the KSE 100 index 7000 points. The government has tried itslevel best to achieve a sustainable economic growth in the country by developingattractive policies to the businessmen and entrepreneur.Project Thesis 4
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan CHAPTER ONE BACKGROUND OF THE SUBJECT AND STATEMENT OF THE PROBLEMProject Thesis 5
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of PakistanCHAPTER NO.1 PROBLEM AND ITS BACKGROUND1.1 INTRODUCTIONAsset securitization is one of the most significant innovations in the global capitalmarkets during the last fifteen years. It has substantially enhanced the efficiency ofassets and liabilities by individuals and corporations. Standard & Poor’s, 2000Asset-Backed Securitization is one of the most exciting areas of application ofsecuritization, particularly from emerging market countries. Securitization is theconversion of receivables and cash flow generated from a collection (pool) of financialassets such as (mortgage loans, auto loans, credit card receivables and other assetsincluding present or future receivables) into securities that are backed by these assets. Inother words, securitization is the “pooling of homogenous, financial, cash-flowproducing, illiquid assets and issuing claims on those assets in the form of marketablesecurities.”The idea of asset backed securitization is to create a capital market product. It results inthe creation of a "security", which is a marketable product. Asset Backed Securities(ABS) is considered both a fixed income and a derivative instrument. Asset BackedSecurities (ABS) qualify as a fixed income instrument because they generate a couponincome (not necessarily fixed) periodically, and qualify as a derivative, since they are aderived instrument from a plain vanilla instrument (a straightforward financialinstrument such as a standard fixed-interest product with no sophisticated add-ons) beingthe underlying pool of assets.Asset Backed Securitization is the issuance of a debt instrument backed by a revenueproducing asset of the issuing company. Asset securitization involves producing bearerasset-backed securities usually Term Finance Certificates in Pakistan, which can befreely traded and which are secured by a portfolio of receivables. In order to ensuremarketability, the instrument must have general acceptability as a store of value; hence,the security is generally either rated by credit rating agencies, or is guaranteed by anindependent guarantor. Further, to ensure liquidity, the instrument is generally preparedin homogenous lots as if it is a case of securitization of future receivables, the assets withthe same maturity will be pooled and taken up for the asset backed securities.Project Thesis 6
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of PakistanASSET-BACKED SECURITIZATION MARKET IN PAKISTAN:Asset-Backed Securitization (ABS) was previously governed by a bare law till 1999. Theonly significant securitization transaction in Pakistan before the guidelines and rules ofSecurities and Exchange Commission of Pakistan was in 1997, the securitization of netsettlement receivables by Pakistan Telecom. Pakistan Telecom in the countrys overseastelephony monopoly and net settlement receivables arise when there are inward calls intoPakistan. Pakistan Telecom, like most of the emerging Asian countries, would normallyhave such remittances as the inward calls by Pakistani residents abroad would exceedthose outward calls, leading to a net settlement receivable. 6 international carriers such asAT&T who were expected to pay to Pakistan Telecom entered into notice-of-assignmentagreements agreeing to pay into the collection account in favor of the SPV.Thereafter, the guidelines and rules have been designed by the Securities and ExchangeCommission of Pakistan in 1999 for the establishment of Special Purpose Vehicle (SPV)to carry out the Asset-backed Securitization in Pakistan. Banks and DevelopmentFinancial Institutions (DFIs’) were attractive to participate in the Securitization byhaving their own Special Purpose Vehicle (SPV). In this regard, State Bank of Pakistanhas received requests from a number of financial institutions desirous of performingvarious roles in assets securitization transactions through special purpose vehicle. Theserequests have been considered in consultation with concerned quarters and it has beendecided that banks/DFIs can participate in assets securitization through SPV. Theseguidelines limit (cap) the total exposure of a bank/DFI towards securities issued by aSpecial Purpose Vehicle (SPV) at 5% of its own paid up capital or 15% of the total valueof the Asset-Backed Securitization (ABS) issued by the Special Purpose Vehicle (SPV)— which ever is less. Further, the aggregate exposure on account of Asset-BackedSecuritization is limited to 20% of the total paid up capital of the bank/DFI. This willencourage banks/DFIs to(a) Invest in and sell-down these Asset-Backed Securities, i.e. to churn their Asset Backed Securities portfolio to stay within the 20% cap and to(b) Actively trade in Asset Backed Securities to develop a secondary market, rather than to simply purchase these Asset Backed Securities and hold them till maturity.Project Thesis 7
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of PakistanSecuritization has not taken off in Pakistan to any appreciable extent. Pakistani marketfor securitization seems to be a curious shape: both these deals are future flows-based,and are domestic future flows. However, three or more transactions have been executedin various sectors i.e. Pakistan International Airlines has struck a deal with Citibank forsecuritization of domestic aviation future flows, ORIX Investment Bank recentlyconcluded a securitization transaction from the oil & gas sector for Orient Petroleum Inc.Trust Investment Bank Limited announced the completion of Rs100 millionsecuritization of lease receivables pertaining to lease portfolio of Pakistan IndustrialLeasing Corporation (which now stands merged into Trust Bank). The deal marks thecompletion of first ever securitization transaction in Pakistan.Most recently, the SECP has granted registration to Securetel-SPV Limited, a whollyowned subsidiary of United Executors and Trustees Limited, to operate as a specialpurpose vehicle under the Companies (Asset Backed Securitization) Rules, 1999.Securetel envisages mobilization of funds for Paktel Limited -a local cellular telecom- byissuing Term Finance Certificates with the total sum of Rs840 million.1.2 STATEMENT OF PROBLEMThis research aim is to respond and analyze the following questions and interviews havebeen conducted from the companies to take information accordingly. 1. The determination of success of Asset-Backed Securitization in the Corporate Sector of Pakistan? 2. The features of Asset-Backed Securities to make its attractiveness? 3. Why the investors are interested to invest in Asset-Backed Securities? 4. The impact of the Asset-Backed Securitization on the Asset and Liability Management Status of the companies? 5. The impact on the liquidity and profitability of the Corporations executed the Asset Backed Securitization transactions? 6. How the Asset-backed Securities have minimized the risk for the corporations? 7. To understand the role of banks and credit rating agencies in the Asset-backed Securitization. 8. Impact of Asset Backed Securities on the Capital Market? 9. What are the future prospects of Asset Backed Securitization in Pakistan? 10. What are the opportunities in the current scenario?Project Thesis 8
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan1.3 SIGNIFICANCE OF STUDYThe information technology and synthetic solutions have been driving the businesses ofthe global economies. To deal with the various risks associated with the businesses, theentrepreneurs have to come up with innovative solutions and asset-backed securitizationis one of them. All the companies face the sovereign risk including the political risk,credit risk and liquidity risk. To deal with these risks and to improve the liquidity andprofitability position of the companies, they have to follow certain innovative solutions.Asset Backed Securitization is one of the techniques adopted by the companies bykeeping in view the securitization of future flow receivables. In this way, the companywill be able to maintain its liquidity and profitability position with out compromising onthe operating and financial position of the company. It allows the development of newinstruments in the capital market which ultimately creates more investment opportunitiesin the capital market. Besides this the study analyzes the opportunities where thisconcept of asset backed securitization can be successfully implemented. The analysis notonly guides the present companies who have already adopted the asset backed securitiesbut also helpful for the potential companies.1.4 SCOPE OF THE STUDYThe scope of this research covers the study of present and future receivables in thecorporate sector of Pakistan, its treatment through asset-backed securitization. Thecorporations treat with trade receivables (present and future) by adopting varioussynthetic techniques i.e. asset-backed securitization for improving their liquidity andprofitability position to remain competitive in the business environment. The studycomprises the period from 1999-2004 and reveals the facts of various companies inpublic and private sectors. The sample taken for the research includes the companies:• Pakistan Telecommunication Limited.• Paktel Limited.• Pakistan Industrial Leasing Corporation.• Pakistan International Airlines.• Associated Constructors Limited.• Orient Petroleum Incorporation.Project Thesis 9
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of PakistanTo get further assistance for the research United Bank Limited for Asset BackedSecuritization in Paktel and Japan Credit Rating agency were also visited to get thedetails of transaction summary.The major limitations for the research are: Disclosure of information termed as confidential by the companies and the bank. Time was another limitation. Since it was not possible to study the whole bankingsector in the time span provided for this study and sampling was used. Budget was another limitation. As there was no sponsor for this study, so thefinancial constraint was also an impediment.1.5 DELIMITATIONThe basic assumptions taken for the research are: There is one independent variable i.e. the Asset Backed Securitization processadopted by the companies and the dependent variables are the profitability of thecompanies, liquidity position of the company, availability of credits at lower cost anddevelopment of an instrument in the capital market. There is no political influence on the economic activities and investmentopportunities in the country.1.6 DEFINITIONS1. Asset Backed Securities a process whereby any SPV raises funds by issue ofTerm Finance Certificates (TFCs) or any other instruments with the approval of theCommission (SECP), for such purpose and uses such funds by making payment to theOriginator and through such process acquires the title, property or right in the receivablesor other assets in the form of actionable claims"2. The entity that securitizes its assets is called the originator: the name signifiesthe fact that the entity was responsible for originating the claims that are to be ultimatelysecuritized.3. There is no distinctive name for the investors who invest their money in theProject Thesis 10
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistaninstrument: therefore, they might simply be called investors. It may include financialinstitutions, insurance companies, banks, state financial corporations, state industrialdevelopment corporations, trustees or any asset management companies makinginvestment on behalf of mutual fund or provident fund or gratuity fund or pension fundor foreign institutional investors.4. The claims that the originator securities could either be existing claims, orexisting assets (in form of claims), or expected claims over time. In other words, thesecuritized assets could be either existing receivables, or receivables to arise in future.The latter, for the sake of distinction, is sometimes called future flows securitization, inwhich case the former is a case of asset-backed securitization.5. Since it is important for the entire exercise to be a case of transfer of receivablesby the originator, not a borrowing on the security of the receivables, there is a legaltransfer of the receivables to a separate entity. In legal parlance, transfer of receivablesis called assignment of receivables. It is also necessary to ensure that the transfer ofreceivables is respected by the legal system as a genuine transfer, and not as mereeyewash where the reality is only a mode of borrowing. In other words, the transfer ofreceivables has to be a true sale of the receivables, and not merely a financing againstthe security of the receivables.6. Since securitization involves a transfer of receivables from the originator, itwould be inconvenient, to the extent of being impossible, to transfer such receivables tothe investors directly, since the receivables are as diverse as the investors themselves are.Besides, the base of investors could keep changing as the resulting security is essentiallya marketable security. Therefore, it is necessary to bring in an intermediary that wouldhold the receivables on behalf of the end investors. This entity is created solely for thepurpose of the transaction: therefore, it is called a special purpose vehicle (SPV) or aspecial purpose entity (SPE) or, if such entity is a company, special purpose company(SPC). The function of the SPV in a securitization transaction could stretch from being apure conduit or intermediary vehicle, to a more active role in reinvesting or reshaping thecash flows arising from the assets transferred to it.Project Thesis 11
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of PakistanTherefore, the originator transfers the assets to the SPV, which holds the assets on behalfof the investors, and issues to the investors its own securities. Therefore, the SPV is alsocalled the issuer. In the Act an independent ‘Securitization Company’ or ‘AssetReconstruction Company’ is envisaged.7. There is no uniform name for the securities issued by the SPV as such securitiestake different forms. These securities could either represent a direct claim of theinvestors on all that the SPV collects from the receivables transferred to it: in this case,the securities are called pass through certificates or beneficial interest certificates asthey imply certificates of proportional beneficial interest in the assets held by the SPV.Alternatively, the SPV might be re-configuring the cash flows by reinvesting it, so as topay to the investors on fixed dates, not matching with the dates on which the transferredreceivables are collected by the SPV. In this case, the securities held by the investors arecalled pay through certificates. The securities issued by the SPV could also be namedbased on their risk or other features, such as senior notes or junior notes, floating ratenotes, etc.8. Another word commonly used in securitization exercises is bankruptcy remotetransfer. What it means is that the transfer of the assets by the originator to the SPV issuch that even if the originator were to go bankrupt, or get into other financialdifficulties, the rights of the investors on the assets held by the SPV is not affected. Inother words, the investors would continue to have a paramount interest in the assetsirrespective of the difficulties, distress or bankruptcy of the originator.Project Thesis 12
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan CHAPTER TWO RESEARCH METHODOLOGY AND PROCEDUREProject Thesis 13
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of PakistanCHAPTER NO: 2 RESEARCH METHODOLOGY ANDPROCEDURES2.1 RESEARCH DESIGNIt includes the set up of research methodology and setup of research design. The researchincludes: Purpose of the Study:The purpose of the study was descriptive in nature in which variables were described indetail for better understanding. Type of the Investigation:It was non-causal or co-relational research. In this study relationships were establishedbetween independent and dependent variable. Study Setting:The study setting was non-contrived. It was a field study as it examined the attitudes andperception of these strategies in their natural environment. Variables were neithercontrolled nor manipulated. Researcher’s Interference:A co-relational study was conducted in the natural environment with the researcherinterfering minimally with the normal flow of events. The extent of research interferencewas minimal. Time Horizon:The study was cross sectional in nature.2.2 RESPONDENT OF THE STUDYThe respondents of the study include the Financial Planning Department of thecompanies selected for the study i.e. Pakistan Telecommunication Limited, Paktel,Pakistan International Airlines, Associated Constructors Limited and Orient PetroleumIncorporation. The bank considered to get the information is United Bank Limited for thedevelopment of case of Asset Backed Securitization and department visited was thetreasury department. One of respondents of the study was the unit head of Corporate &Structured Finance of Japan Credit Rating Agency (JCR-VIS).Project Thesis 14
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan2.3 INSTRUMENTSThe instruments include the primary and secondary sources of the data collection for theresearch. Primary sources of the data collection are the formal and structural interviewsand the observations techniques. An open ended questionnaire has been designed toinvestigate the related matters of the research which includes all the related questionsabout the asset backed securitization process, its development, its implementation, andits impact over the operational activities of the companies.While the secondary sources includes the: Audited annual reports and accounts. Other statutory statements. Economic publications. Central Bank Publications. Credit Rating Agencies Publications. World Wide Web. Books and other Publications.It also includes the visit to the Institute of Bankers, Pakistan Library for the datacollection from various published notes.2.4 TREATMENT OF DATAThe analysis will be done on the basis of the data gathered by visiting the companies andinformation revealed by them. The treatment will be in the descriptive form by analyzingthe results of securitization adopted in the companies in terms of the account receivablecollection, improving status of liquidity, the profitability, and other operational activitiesof the companies in the figures.2.5 PRESENTATION ANALYSISFinal presentation of the facts will be in the form of tables, figures and the statisticalcharts. Various schedules will be used to show the profitability situation of thecompanies, its collection of present and future receivables.Project Thesis 15
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan CHAPTER THREE REVIEW OF LITERATURE AND STUDIESProject Thesis 16
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of PakistanCHAPTER NO 3: REVIEW OF LITERATURE & STUDIESThe development of a viable securitization market is extremely dependent upon the legaland regulatory framework that is in place to provide adequate protection for investors.The development of a thriving securitization environment in Pakistan is no exception.The companies, investors, banks and development financial institutions were attractive toexecute the securitization deals in Pakistan. It is therefore, various deals regarding thepresent and future receivables of the companies have been executed through asset backedsecuritization in various business sectors of the country i.e. leasing sector, telecomsector, oil sector, aviation sector and construction areas. To have the better understandingabout the securitization it is necessary to discuss the features the asset backedsecuritization, mechanism and process of asset backed securitization, its beneficiaries,investors of asset backed securities and motivation for the originator of ABS:3.1 FEATURES OF ASSET-BACKED SECURITIZATION:A securitized instrument, as compared to a direct claim on the issuer, will generally havethe following features:3.1.1 MARKETABILITY The very purpose of securitization is to ensure marketability to financial claims. Hence, the instrument is structured so as to be marketable. This is one of the most important features of a securitized instrument, and the others that follow are mostly important only to ensure this one. The concept of marketability involves two postulates: (a) The legal and systemic possibility of marketing the instrument; (b) The existence of a market for the instrument. Securitization is a fallacy unless the securitized product is marketable. The very purpose of securitization will be defeated if the instrument is loaded on to a few professional investors without any possibility of having a liquid market therein. Liquidity to a securitized instrument is afforded either by introducing it into an organized market (such as securities exchanges) or by one or more agencies acting as market makers in it, that is, agreeing to buy and sell the instrument at either pre- determined or market-determined prices.Project Thesis 17
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan3.1.2 MERCHANTABLE QUALITY To be market-acceptable, a securitized product has to have a merchantable quality. The concept of merchantable quality in case of physical goods is something which is acceptable to merchants in normal trade. When applied to financial products, it would mean the financial commitments embodied in the instruments are secured to the investors satisfaction. "To the investors satisfaction" is a relative term, and therefore, the originator of the securitized instrument secures the instrument based on the needs of the investors. The general rule is: the broader the base of the investors, the less is the investors ability to absorb the risk, and hence, the more the need to securities. For widely distributed securitized instruments, evaluation of the quality, and its certification by an independent expert, viz., rating is common. The rating serves for the benefit of the lay investor, who is otherwise not expected to be in a position to appraise the degree of risk involved. In securitization of receivables, the concept of quality undergoes drastic change making rating is a universal requirement for securitizations. As securitization is a case where a claim on the debtors of the originator is being bought by the investors. Hence, the quality of the claim of the debtors assumes significance, which at times enables to investors to rely purely on the credit-rating of debtors (or a portfolio of debtors) and so, make the instrument totally independent of the originators own rating.3.1.3 WIDE DISTRIBUTION The basic purpose of securitization is to distribute the product. The extent of distribution which the originator would like to achieve is based on a comparative analysis of the costs and the benefits achieved thereby. Wider distribution leads to a cost-benefit in the sense that the issuer is able to market the product with lower return, and hence, lower financial cost to him. But wide investor base involves costs of distribution and servicing. In practice, securitization issues are still difficult for retail investors to understand. Hence, most securitizations have been privately placed with professional investors. However, it is likely that in to come, retail investors could be attracted into securitized products.3.1.4 HOMOGENEITY To serve as a marketable instrument, the instrument should be packaged as into homogenous lots. Homogeneity, like the above features, is a function of retailProject Thesis 18
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan marketing. Most securitized instruments are broken into lots affordable to the marginal investor, and hence, the minimum denomination becomes relative to the needs of the smallest investor. The need to break the whole lot to be securitized into several homogenous lots makes securitization an exercise of integration and differentiation: integration of those several assets into one lump, and then the latters differentiation into uniform marketable lots. This often invites the next feature: an intermediary to achieve this process.3.1.5 SPECIAL PURPOSE VEHICLE In case the securitization involves any asset or claim which needs to be integrated and differentiated, that is, unless it is a direct and unsecured claim on the issuer, the issuer will need an intermediary agency to act as a repository of the asset or claim which is being securitized. Let us take the easiest example of a secured debenture, in essence, a secured loan from several investors. Here, security charge over the issuers several assets needs to be integrated, and thereafter broken into marketable lots. For this purpose, the issuer will bring in an intermediary agency whose basic function is to hold the security charge on behalf of the investors, and then issue certificates to the investors of beneficial interest in the charge held by the intermediary. So, whereas the charge continues to be held by the intermediary, beneficial interest therein becomes a marketable security. The same process is involved in securitization of receivables, where the special purpose intermediary holds the receivables with it, and issues beneficial interest certificates to the investors.3.1.6 ASSETS THAT CAN BE SECURITIZED Basically, all assets which generate a cash flow can be securitized e.g. mortgage loans, housing loans, automobile loans, credit card receivables, trade receivables, consumer loans, lease finance, etc. a perfectly and normal financial asset is usually securitized. A difference is usually made between asset securitization and mortgage securitization. Asset securitization is protected from a pool of loans and receivables while the mortgage backed securities are protected by residential or commercial mortgage loans however mortgage backed securities is a particular type of asset backed securities.Project Thesis 19
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan3.2 MECHANISM OF ASSET-BACKED SECURITIZATION AND ITS BENIFICIARIES:The process of Asset Backed Securitization is summarized in the following diagram andis described in detail: Trustees Corporate Assets Issue Investors Special Purpose Receivables Vehicle Asset-Backed Securities Credit Enhancer Service Manager3.2.1 PROCESS OF ASSET BACKED SECURITIZATIONThe process of creating asset backed securities is discussed in the following points:1. The Company sells its products and services on credit and this becomes the trade receivables or account receivables in the balance sheet of the company.2. Out of these receivables, the originator pools certain receivables together on the basis of maturity and risk structures and sells these to a securitization company known as Special Purpose Vehicle (SPV) or Special Purpose Entity (SPE).3. The securitization company makes payment (consideration) to the originator for the receivables purchased.4. These receivables are converted into a pool of securities by the securitization company for the purpose of issuing Pass Through or Pay through Certificates (PTCs).5. These Pay Through or Pass Through Certificates are then rated by Credit Rating Agencies e.g. Pakistan Credit Rating Agencies (PACRA), JCR-VIS Credit Rating Co. Ltd.Project Thesis 20
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan6. The Pay Through or Pass Through Certificates are sold to individual investors or Qualified Institutional Buyers.7. The Collection of receivables from debtors is obtained by Company itself in case of Pass Through Certificates and by Securitization Company in case of Pay Through Certificates. If collection is made by the Company then it is under obligation to pass on the money to the securitization company.8. The securitization company then, makes payment to the investors.3.2.2 WHY DO ISSUERS NEED SECURITIZATION?The need for cash is to grow and expand the business. Raising equity and borrowingthrough debt is difficult, expensive and can distort the financial leverage of a company.Equity and bonds are two sources of “on-balance sheet” financing. Securitization, on theother hand, is an “off-balance-sheet” source of funds. According to the FASB, rulesgoverning securitization (assuming all conditions are met) cash and proceeds from thesale of assets are added to assets, while the transferred asset itself is taken off the balancesheet. ABS offer increased liquidity through a broader market. Besides this the originatorof asset-backed securitization may benefit in the following manners:• Securitization mainly results in receivables being replaced by cash thereby improving the liquidity position.• It removes the assets from the balance sheet of the originator, thus liberating capital for other uses, and enabling restructuring of the balance sheet by reducing large exposures.• It facilitates better asset liability management by reducing market risks resulting from interest rate mismatches. The process also enables the issuer to recycle assets more frequently and thereby improve earning.• Finally, transparency may be improved since securitization results in identifiable assets in the balance sheet.Reasons to Securitize Receivables:Probably the most common reason to securitize receivables is to efficiently raise cash.Enhancing working capital is especially important for companies with long sales cyclesand terms of sale. Given that receivables are typically the largest single asset category onthe balance sheet, it is a natural choice for monetization. The securitization processProject Thesis 21
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistangenerally provides companies broader access to capital at a lower all-in-cost of funds.This is especially true for companies whose creditworthiness is weaker than theircustomers. In such instances there exists a credit arbitrage. A well-structuredsecuritization can achieve an investment grade rating even for a selling company that isnot investment grade rated. Through standardized underwriting, robust servicing, creditinsurance and appropriate structuring, a company can intends to further broaden theopportunities for mid-sized companies to bootstrap their access and resultingefficiencies. Achieving balance sheet management objectives can be an additional reasona company chooses to securitize their receivables. Sale treatment can be achieved withthe resulting opportunity to de-leverage through the use of proceeds to redeemoutstanding debt. Compliance with debt or loan covenants can be fostered throughimprovements in certain balance sheet ratios and metrics, including: days salesoutstanding (DSO), “quick” ratio, return-on-assets (ROA) and debt-to-equity ratio.3.2.3 WHY DO INVESTORS INVEST IN ASSET-BACKED SECURITIES?These the reasons the investors prefer to invest in asset-backed securities: • Securitization creates instruments with differing maturities, risks, coupons, which is appealing to investors. Securitization is a structured financial instrument i.e. tailored to the risk-return and maturity needs of investors, rather than a simple claim against an entity or asset. • Asset-Backed Securitization offers a yield higher than instruments with comparable risk. This is due to the credit worthiness of the instruments (usually AAA rated) and the credit enhancement features. • Asset-Backed Securitization offers a predictable cash-flow. Investors buy Asset- Backed Securities with confidence that payments will occur at specified dates in the future. • Asset-Backed Securities are secured by the underlying assets; therefore they offer significant protection against downgrades by rating agencies to the issuer. • It provides an opportunity to the investors to diversify their investment portfolio by investing in these asset backed securities.Project Thesis 22
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan3.2.4 IMPACT OF ASSET-BACKED SECURITIZATION ON CAPITAL MARKET:The impact of asset-backed securities on capital market can be analyzed in the followingpoints: • Securitization reduces transaction costs in the capital market by creating a market for financial claims, which otherwise, would have remained illiquid, i.e. limited trading. • Securitization saves intermediation costs, since the specialized intermediary costs are service related and generally lower. Securitization promotes saving since it offers a security to investors with guaranteed interest or payments and an assurance of credit quality and safety nets in the form of trustees. • Securitization leads to diversification of risk since it pools several financial assets with differing features together and offer them to investors. When the ownership of the asset becomes spread among a wide base of investors, it becomes diffused, thus reducing the inherent risk in financial transactions. • Securitization promotes the idea of capitalists being trustees of resources and not owning them. Just as financial assets can be securitized, physical assets can also be securitized, which means that an entity can make use of physical resources without actually owning them.3.2.5 MOTIVATIONS IN FUTURE FLOW SECURITISATIONAn originator in a future flow securitization would look essentially at two motivations: Does it allow the originator to borrow more than under traditional funding methods; Does it allow the originator to borrow at lesser cost than under traditional funding methods?There is no certain answer to either of these two questions, but the economics of anyfuture flow deal should be tested on the above. It is possible that a future flowsecuritization may allow the originator to borrow more, since, while a typical traditionallender looks at the assets on the balance sheet (say, receivables which have fallen due), aProject Thesis 23
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistanfuture flow investor looks at receivables which are not on the balance sheet. A futureflow transaction may even allow the originator to borrow at lesser costs.3.2.6 MANAGING RISKS IN FUTURE FLOWS SECURITIZATION:Developing an appropriate legal structure and managing credit risk are the two biggestchallenges in ensuring the success of an asset-backed issue. Many investors whorecognize that asset-backed securities can be a rewarding component of their portfoliosare unwilling or unable to perform the complex analysis required. They may also beunable or unwilling to bear the credit and other risks associated with these instruments.Fortunately, in the United States and certain other countries, the ABS market issufficiently well developed that the risks can be carefully identified and reallocated tothose best able to bear them. Today, the techniques for doing so are being transferred toAsia.Since investors rely heavily on the detailed assessments and ratings assigned by theprincipal rating agencies such as Moody’s and Standard and Poor’s, early involvement ofthese agencies in the risk-management process makes good sense. The rating agenciesfocus on such issues as the following. Involvement of the rating agencies in the ABSrisk-management process is essential, since investors rely heavily on their assessments.§ Credit risk§ Liquidity risk§ Financial guaranteesCredit risk:It arises from the possibility that the issuer of an ABS, usually a special purpose vehicle,may default on its liabilities. Since the SPV is normally structured to have no assets orbusiness other than holding the securitized assets, the principal focus is on the cash flowfrom the assets themselves. The most important possibility to be considered is default bythe underlying borrowers, such as the car owners in the case of automobile loansecuritization. While a small but predictable loan loss ratio is manageable, the ratingagencies must carefully analyze the variations in default and delinquency rates andevaluates any factors that might trigger an escalation in defaults.Since the SPV is normally structured to have no assets or business other than holding thesecuritized assets, the principal focus is on the cash flow from the assets themselves.Project Thesis 24
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of PakistanLiquidity risk:It is the possibility of a cash shortfall at times when interest or principal payments aredue. If the individual obligors behind the underlying loans are late with their payments,cash flow to the SPV may be insufficient for it to make interest and principal paymentsin full and on time to investors. The cash flow from the underlying assets to the investorsshould be structured -- and, if necessary, supplemented -- in such a way that no suchshortfall will occur.Financial Guarantee:Many asset- backed securities are guaranteed, to remove the burden of analysis from theinvestor. Rather than having to conduct a detailed analysis of a complex structure, manyinvestors prefer to rely on a top-rated, specialized financial institution whose onlybusiness -- and livelihood -- depends upon maintaining its top rating through extremelyprudent credit policies.3.3 ASSET-BACKED SECURITIZATION IN PAKISTAN:Following the October 1999, there was a reform driven agenda causing an unprecedentedamount of regulatory and enabling legislation in Pakistan. Law making in Pakistan hasnow become a more consultative and transparent process with cluster participation andinput being a key feature. However, state policy has often defeated by persistentbottlenecks in the administrative machinery and wherever official and lower levelcorruption are endemic.In some ways ABS is not a whole new feature in Pakistan. Indeed, corporate debt issuesby leasing companies that were secured by way of assignment of specific lease rentalshad resemblance to ABS. However, these did not qualify as true ABS since theassignment of lease receivables did not constitute a ‘true sale’ by way of an SPV.Assigned receivables also, were not removed from the balance sheet of the issuer.In what can best be called a piecemeal effort, THE COMPANIES (ASSET BACKEDSECURITIZATION) RULES, 1999 open up the securitization market in Pakistanthrough Statutory Regulatory Order 1338(I)/99. Only eleven sections long, the Rules failto cover much ground in terms of detail but open up tremendous scope of ABS activityin their interpretation. The skeletal law leaves therefore, tremendous room for expansionand development of ABS in Pakistan where securitization provides a means ofProject Thesis 25
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistanliquidating certain assets (normally long-term receivables) on the balance sheet of afinancial institution by issuing marketable securities against these assets. It, therefore,represents a process whereby the balance sheet can be unlocked by freeing up capitaltied-up in long-term assets that are essentially illiquid in nature.3.3.1 SETTING UPAside from government owned entities, the Rules allow any Public Limited Company(SPC) or a Trust (SPT) to register with the Securities & Exchange Commission ofPakistan (SECP) for the purposes of becoming an SPV.The SPC must adhere to the comprehensive provisions of the Companies Ordinance1984 which created by formerly Corporate Law Authority (CLA). The CLA has sincebeen replaced by the SECP (created under the Securities and Exchange Commission ofPakistan Ordinance, 1997); which now continues to be a strong regulator of Equity andInvestment in Pakistan. The Ordinance governing Special Purpose Committees (SPC)also covers matters of Winding up & Insolvency, Schemes for Amalgamation andDisclosure. In addition to this, an SPC must have a paid up capital of at least onehundred thousand rupees (approx. US$1666).The Trusts Act in Pakistan dates back to 1882 and has thus developed rich case lawoffering an appropriate vehicle for entities including non-profit organizations, charitiesand grant foundations. The Ordinance also applies in some cases to SPTs as prescribed inthe Rules.3.3.2 REGISTRATION ISSUESAn aspiring SPV with directors, officers or employees that have been adjudged asinsolvent, have suspended payment, compounded with creditors, have been convicted offraud or breach of trust or of an offence involving moral turpitude is precluded fromRegistration with the SECP. The Rules do not address jurisdictional issues where theabove-mentioned offences are committed in foreign law jurisdictions, by foreign entities.Arguably, it appears that such entities may not be barred from registration by the SECP.The Rules give the SECP powers to bar an entity where the promoters, directors andtrustees of such person are, in the opinion of the SECP, not persons of means andintegrity and do not have special knowledge and experience of matters to be dealt withProject Thesis 26
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistanby a SPV. Such discretion may be founded in bad policy where necessary opinions of theregulator may lie well against an entity for personal reasons and indeed the globallessons of Enron might be hard learnt by such entities.Upon application for registration by the Trust or Company, a fact finding inquiry ensueswhich leads to the SECP granting a certificate of registration. In addition to the eligibilitycriteria prescribed in the Rules, information relating to the Originator, Obligator, Trusteeand other related parties in the transaction along with the details of the securitizationtransaction are also required upon application. The Rules place certain obligations ofperiodic reporting upon the SPV and give the SECP powers to cancel the registrationif the SPV fails to make a public offering of securities within such time frame and insuch manner as may be specified by it while granting the certificate of registration. If theSECP is satisfied that it would be in the public interest so to do, it may on its ownmotion, or on the application of the investors holding not less than ten percent of thesecurities issued by such SPV, by order in writing, cancel the registration. However,the SPV has been given the right of hearing before any such order is passed within theRules. To rule out possible conflicts of interest, the ABS Rules also require that theOriginator and the SPV not be "connected persons" defined as any person or companybeneficially owning, directly or indirectly, ten per cent or more of the share capital ofthat SPV or able to exercise directly, or indirectly, ten per cent or more of the votingrights in that company.3.3.3 OPERATIONSA Trust is by far the most appropriate choice of SPV to issue Asset Backed Certificatesby process of Asset Backed Securitization which has been defined in the Rules as: "A process whereby any SPV raises funds by issue of Term Finance Certificates(TFCs) or any other instruments with the approval of the Commission (SECP), for such purpose and uses such funds by making payment to the Originator andthrough such process acquires the title, property or right in the receivables or other assets in the form of actionable claims"The Pakistan Code of Corporate Governance, notified by the SECP in the wake ofEnron’s collapse, has no applicability to SPTs although it is a mandatory requirement toimplement for all public listed companies since early this year. Any securitizationProject Thesis 27
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistanactivity in Pakistan must also be in conformity with the Islamic principles of finance andinvestments which prohibit interest based lending, but encourage management of risk inexpectation of profit or mark-up.The Rules define "future receivables" to include all such receivables against whichincome may accrue or arise at a future date. An inclusionary structure therefore leavesthe playing field for ABS wide open. External credit enhancement can be obtained forthe securitization structure by means ofPool & bond insurances (to cover any losses on the pool of assets),Letters of credit from banks (to cover losses up to a certain amount) andCorporate guarantees (either from a third party or from the Originator).Advertisements, prospectuses and other invitations to the public to invest in a scheme,including public announcements, must be submitted to the SECP for approval prior totheir issue. The approval may be varied or withdrawn but not before a hearing. SPVsmay at all times take legal recourse against the orders of the SECP.3.3.4 PROHIBITIONSAn SPV in Pakistan is generally prohibited from: merging with, acquiring or taking over any other company or business, unless it has obtained the prior approval of the Commission in writing to the scheme of such merger, acquisition or take-over; pledging any of the assets held or beneficially owned by it except for the benefit of the investors; making a loan or advancing money to any person except in connection with its normal business; participating in a joint account with others in any transaction; applying any part of its assets to real estate except property for its own use; making any investment with the purpose of having the effect of vesting the management, or control, in the Special Purpose Vehicle; andProject Thesis 28
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan giving guarantees, indemnities or securities for any liability of a third party;3.3.5 PROBLEMSThe rather hastily drafted Rules leave much to be desired in terms of emphasizing a truesale for adequate bankruptcy remoteness and leave definitional issues mostly nebulousand left to the better practice of industry. The Rules do not explicitly state that the assetsmust be owned by a Special Purpose Vehicle (SPV), whose ownership of the sold assetsis likely to survive the bankruptcy of the Seller. Thus the conceptual understanding of atrue sale is alien to many an investor in Pakistan.Trusts are by far the most convenient vehicle for securitization in Pakistan, although theRules prescribe no minimum standards for them. Being a single purpose entity, the Rulesdo not provide for any voluntary deregistration mechanism or a renewable operationaltimeframe for the SPV. Neither do the Rules specify any servicing or liquidity supportobligations inter se the Originator and the SPV although secure originators assigninglease receivables in Pakistan operate with certain negotiable minimum standards forservicing, credit enhancement and non-interest based lending. The ABS Rules are alsosilent on the issue of private placement though the SECP has allowed certain strongfinancial companies to make private placements for lease receivables and thereby issueTFCs.3.3.6 HURDLES & INITIATIVESSecuritization is at a nascent stage in Pakistan. Indeed, Income Tax and IslamicJurisprudence have been the most persistent retardants for growth and development ofthe debt market. A lack of legal and regulatory framework coupled with tax obstacles inthe transfer of financial assets and issuance of TFCs have further impeded ABS. Giventhat Pakistan’s inherent sovereign risk considerations have hindered cross – bordertransactions in the past, the newly ushered government and US interests in the regionpromise some stability of governance, law and order.The income of an SPV is now exempted from tax through the Finance Ordinance 2000and they also receive preferential withholding treatment. Although stamp duties are stillapplicable to the transfer of assets, the stamp duties in respect of issuance of TFCs havebeen greatly reduced. As a matter of policy the SECP is dedicated to the facilitation ofventure capital, corporate debt and securitization. The Board of Investment’s Policy nowProject Thesis 29
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistanallows foreign investment on a repatriable basis is in the Service, Infrastructure, Socialand Agriculture Sectors subject to certain conditions. The dependable presence of FitchRatings and the International Finance Corporation (IFC) as a Credit Rating agency hasadded to investor confidence in the Capital and Debt markets of Pakistan. Mostpromising for the ABS market are guidelines for the relaxation of Prudential Regulationsfor Banks and DFI in respect of investment in securities issued by SPVs are currentlybeing drafted by the State Bank of Pakistan (SBP).Project Thesis 30
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan CHAPTER FOUR PRESENTATION ANALYSISProject Thesis 31
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan4.4 MARKET OVERVIEW:Securitization was not taken off in Pakistan to any appreciable extent till 1997. The onlysignificant securitization transaction in Pakistan in 1997 was the securitization of netsettlements receivables by Pakistan Telecom. Pakistan Telecom in the countrys overseastelephony monopoly and net settlement receivables arise when there are inward calls intoPakistan. Pakistan Telecom, like most of the emerging Asian countries, would normallyhave such remittances as the inward calls by Pakistani residents abroad would exceedthat outward calls, leading to a net settlement receivable. 6 international carriers such asAT&T who were expected to pay to Pakistan Telecom entered into notice-of-assignmentagreements agreeing to pay into the collection account in favor of the SPV. Thereafter,there was a considerable growth noted in the securitization market and especially afterthe approval of rules and regulations by Securities and Exchange Commission ofPakistan in 1999. The transactions include the: • Securitization of receivables of Paktel, • Securitization for non performing leases/Loans of the leasing company named Pakistan Industrial Leasing Corporation Limited, • Securitization of future receivables of Orient Petroleum Incorporation, Pakistan Branch, • Securitization of future flow receivables arising from a construction project of Associated Constructors Limited in the construction process of six towers of Creek Vistas Towers in Creek City Project. This securitization was the latest from all the securitization deals in Pakistan.The case studies have been developed for the study of securitization deals, itsmechanism, its originators, its special purpose vehicles i.e. securitization trusts. The casestudies of different sectors and companies have been designed for the betterunderstandings are discussed below namely: • Paktel Company Limited. • World Call Payphones Limited. • Pakistan Telecommunication Limited.Project Thesis 32
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan • Pakistan Industrial Leasing Corporation. • Associate Constructors Limited. • Orient Petroleum Limited. • Pakistan International Airlines.4.1.1 TELECOM SECTOR (PAKTEL LIMITED)Special Purpose Vehicle: Securetel-SPV Limited.Originator: Paktel Limited.Recently, the SECP has granted registration to Securetel-SPV Limited, a wholly ownedsubsidiary of United Executors and Trustees Limited, to operate as a Special PurposeVehicle under the Companies (Asset Backed Securitization) Rules, 1999. Securetelenvisages mobilization of funds for Paktel Limited -a local cellular telecom- by issuingTFCs. Of the total sum of Rs840 million, TFCs worth Rs640 million would be offered aspre-IPO and Rs200 million in IPO. The TFC is rated "A" (single A) by PACRA, is for 3year tenor and carries profit at SBP discount rates plus 200 bps with a cap of 16 per centand floor of 12 per cent for the first year and 11.5 per cent for the last two years. UnitedBank Limited has acted as consultant for the ABS transaction. This securitization wouldenable Paktel to replace its short-term foreign currency debt with medium-term localcurrency debt. Considering the fall of the greenback following 9/11, the transactionwould improve Paktels liquidity position by reducing foreign exchange losses.Securetel purchased a portion of Paktel’s receivables and issued ABS notes in March2003. Paktel in turn expects to utilize the proceeds in retiring partly its existing loans ofUnited Bank Limited of Rs750 million and Pak Kuwait Investment Companys Rs240million. Nearly 99 per cent shares in Paktel are held by the Luxembourg based MillicomInternational Cellular S.A, which is a fairly large holding company with 18 cellularoperations in 17 countries. Another major player, Orascom Telecom is also expected toassign its nationwide receivables to a foreign bank in Pakistan.Analysts at IP Securities (Pakistan) said that with the falling rate of returns on NationalSavings Schemes (NSS) and Government Securities for the general public and financialinstitutions, investment avenues were falling short and the facilitation of innovativeinstruments was needed. Paktel had suffered huge exchange losses till the financial yearProject Thesis 33
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan2001, due to foreign currency borrowings, a significant portion of which had been paidoff through internal cash generation and short-term loans. This had led to high relianceon short-term borrowings. Paktel had therefore decided to issue medium term securitizedTFCs to rationalize its capital structure and to correct imbalance in asset liabilitymaturity profile.The analyst noted that Paktel had suffered huge exchange losses till the financial year2001, due to foreign currency borrowings, a significant portion of which had been paidoff through internal cash generation and short-term loans. This had led to high relianceon short-term borrowings. Paktel had therefore decided to issue medium term securitizedTFCs to rationalize its capital structure and to correct imbalance in asset liabilitymaturity profile.The mitigants part of the Prospectus listed among others the following: The purpose ofsecuritization was to segregate the operational performance of a company from itsfinancial performance. The risk was on the operational performance of Paktel rather thanon its financial performance; the investment by the TFC holders would be in securitiesissued by SPV and not in Paktel. Thus the TFC holders would not largely be dependenton the financial performance of Paktel; the transaction was a future flow transaction,because it was not backed by cash flows generated by an existing pool of assets, butrather by cash flows from assets that would be generated in the future.The prospectus noted that the future flow transactions were dependent on the ability ofthe company to produce a good or provide a service, and thus derived their strengthsfrom segregating its performance from the overall financial profile of the company. Byseparating operational from financial performance such transactions offered a less riskyinvestment alternative.According to other details noted in the prospectus, of the total sum of Rs840 million,TFCs worth Rs640 million would be offered as pre-IPO and Rs200 million in IPO. TheTFC is rated "A" (single A) by PACRA, is for 3 year tenor and carries profit at SBPdiscount rate plus 200 bps with a cap of 16 per cent and floor of 12 per cent for the firstyear and 11.5 per cent for the last two years.Project Thesis 34
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan4.1.2 WORLDCALL PAYPHONES LIMITED:The telecom sector itself has seen substantial activity in structured finance. WorldCALLPayphones Limited is one of Pakistans fastest growing telecom companies, with aninstalled base of over 5,000 smart card payphones throughout Pakistan. WorldCALLneeded to raise Rs. 345 million in new equity financing to fund a major expansion plan,including 8,000 additional card phones and a proposed wireless local loop networksupporting 50,000 additional phones. Following the unsuccessful attempts of anothersecurities firm to effect the offering and reopen the Pakistani IPO market, after a dryspell of over two years, WorldCALL appointed AKD Securities as its financial advisorto raise the necessary funds.Realizing the potential upside for well funded private companies in Pakistansincreasingly deregulated telecom sector, AKD underwrote the offering. After leading aRs. 195 million pre-IPO placement with institutional investors, AKD generated demandfor the IPO and as a result WorldCALLs Rs. 150 million IPO was heavilyoversubscribed and the company received the funds necessary for it to continue on itsgrowth trajectory.Head of Research at IP Securities, Iffat Zehra Mankani commented that it wasencouraging to note the pace of growth at which financial instruments that were new inthis part of the world were being introduced. Analyst said that with the falling rate ofreturns on National Savings Schemes for general public and Government Securities forthe financial institutions, investment avenues were falling short and the introduction ofinnovative instruments was needed.Project Thesis 35
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan4.1.3 PAKISTAN TELECOMMUNICATIONS LTD.Net Settlement SecuritizationIn 1997, Fitch rated a securitization of Pakistan Telecommunications Ltd.’s (PTCL) netsettlement receipts. The receivables in this type of transaction are the net amountsgenerated by tariffs that one company owes to another for the use of itstelecommunication infrastructure when completing international calls. These tariffs arisewhen individuals in a developed country (e.g., the United States, Japan or Germany)make calls into an emerging-market country (e.g., Chile, Pakistan or Peru). Although thedeveloped-market company, MCI, for example, is originating the call and collecting therevenues from the individual in the developed country, MCI must use PTCL’sinfrastructure to complete the call. PTCL allows MCI to use its infrastructure but chargesthe company a fee for each minute of use. Similar fees are charged to PTCL when callsoriginate in Pakistan and go to MCI’s market. There is a net amount in favor of PTCL,because the volume of originating calls tends to be much higher in the United States thanPakistan. It was these international net payments that were securitized in the PTCLtransaction. A key factor to this transaction was that the international carriers, such asMCI, signed notice and acknowledgement agreements (N&As) that legally obligatedthem to remit payments into the offshore collection account that is used to pay investors.This structure mitigates certain sovereign risks, such as transfer and convertibility andsovereign redirection. Due to this structure, Fitch initially rated the transaction ‘BBB–’.This rating meant the transaction had a lower probability of default compared to that ofthe sovereign. Additionally, Fitch rated the transaction above PTCL’s local currencyrating due to the company’s monopoly status in the local market and the high ratio of netsettlements in favor of Pakistan. Furthermore, the company is fully supported by thegovernment since it is 88% state owned. Rating the transaction above the local currencyrating of PTCL and the sovereign signifies that Fitch believes the net settlement cashflows would continue to pay offshore investors, even during a default on local creditors.From 1998–2001, Pakistan’s and PTCL’s credit quality deteriorated. Due to the declinein credit quality and an increased risk of cash flow disruption, Fitch downgraded thetransaction first in June 1998 to ‘BB+’ and then again in October 1999 to ‘BB’.Additional concerns included the drastic declines in net settlement tariffs.Project Thesis 36
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of PakistanContinued PerformanceThe PTCL transaction will mature in August 2003 and currently has an outstandingbalance of US$2.9 million out of the original issuance of US$250 million. The deal hasbeen performing well since 2001: the average receivables for the past year and a halfhave been US$45.9 million, and the coverages have been well-above the required levels.The purchased receivables debt service coverage ratio (DSCR) has averaged 3.0x (twicethe 1.5x requirement), and the sum of the two lowest purchased receivables DSCRsduring four consecutive periods has averaged just less than 3.0x (more than the required2.0x coverage). These levels are shown in the PTCL 12-Month Rolling DSCRs andProject Thesis 37
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of PakistanPTCL Performance charts. While Fitch still does not publicly rate Pakistan, the ‘BB’rating on the transaction is still notches higher than what we believe the sovereign ratingto be. This rating differential reflects Fitch’s opinion that the risk of the net receivablesnot going to investors (per the going concern assessment) remains relatively lowcompared to our view regarding the sovereign’s creditworthiness in the currentenvironment. The ‘BB’ rating is supported by various aspects of the transaction. PTCLholds a 100% market share within Pakistan; the ratio of net settlements will continue tofavor Pakistan; the decline in settlement rates has been offset by an increase in volume;and the N&As.Securitization of international receivables Currency balance Rupee equivalent Quarterly Currency 2003 2002 2003 2002 Installments (Amount in thousand) (Rupees in thousand) Payable US $ 15,126 72,576 876,106 4,383,584 1The company obtained funds aggregating US $ 250 million against securitization of itsfuture international receivables relating to certain carriers. Under the arrangements, thesecarriers have irrevocably assigned the companys future receivables to a Trust set up forthis purpose for the tenor of the facility. The cash flows arising from these receivablesare paid to the company by the Trust after deducting there from the repayment ofprincipal and return that investors in the Securitization Trust are to receive and retaininga cash margin as a default cushion. Interest is payable quarterly at 8.42% per annum.Project Thesis 38
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan4.1.4 THE LEASING SECTOR:(PAKISTAN INDUSTRIAL LEASING CORPORATION)Earlier in June 2002, the specialized Companies Division of the SECP processed theregistration of First Securitization Trust as the first special purpose vehicle under theCompanies (Asset Backed Securitization) Rules, 1999. This trust has been set up to raisefunds for Pakistan Industrial Leasing Corporation Limited (PILCORP) up to rupees onehundred million through issuance of debt instruments against the Securitization ofPILCORPs lease receivables. The said transaction was arranged by Aqeel Karim DhediSecurities (Pvt) Limited (AKD) and Orix Investment Bank Limited to provide funds toPILCORP for retiring its debt obligations. In emerging markets like Pakistan, wherevolatile economic cycles and sudden shocks are translated on the asset portfolio,protection against deteriorating credit quality is very important. This unstable nature ofPakistan’s economy has highlighted the importance of a strong capital base which canprovide protection against unanticipated losses. Furthermore, substantial capital providesa leasing concern with greater flexibility to leverage its balance sheet. On the other hand,for leasing companies in developed markets, deterioration in the asset quality usuallyoccurs over the long run, thus enabling them to increase general reserves/provisioningagainst potential losses over a period of time. A serious issue plaguing the leasing sectoris the high rate of non-performing leases and loans (NPLs), a situation that can beattributed primarily to the inadequacy of risk assessment procedures and, to a lesserdegree, limited industrial growth that has led to sectoral concentration. Leasing across aspectrum of industries reduces the risk of impairment in the asset quality. Strict creditpolicies and continuous monitoring of the portfolio are looked upon favorably by creditrating companies and accounts are reviewed closely to establish a companys exposure ineach sector, which if exceeds 20% of Net Investment in Leases (NIL) prompts a furtherexamination. Similarly, a drag on ratings may occur if exposure to a single client exceeds15% of total equity. SECP is paying increasing attention to this factor and has recentlyproposed an amendment in the rules that govern the leasing sector by restrictingexposure to a single party to 30% of unimpaired capital and reserves instead of theearlier limit of 20% of NIL.STATUS: Trust Investment Bank Limited announced the completion of Rs100million securitization of lease receivables pertaining to lease portfolio of PakistanProject Thesis 39
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of PakistanIndustrial Leasing Corporation (which now stands merged into Trust Bank). The dealmarks the completion of first ever securitization transaction in Pakistan.A press release issued by Orix Investment Bank Pakistan Limited - one of the twoadvisers to the securitization, the other being AKD Securities (Pvt.) Limited - stated thatThe First Securitization Trust (FST) was the Special Purpose Vehicle (SPV) throughwhich the securitization had been conducted. The press statement stated that all parties tothe transaction appreciated the cooperation offered by the SECP. "They furthermentioned that the State Bank of Pakistan was also considering guidelines for thesecuritization of receivables which when approved would enable the financialinstitutions to invest in SPVs.Speaking at the signing ceremony, Ali Ansari, CEO of AKD Securities and NaimFarooqui, CEO of Orix Investment Bank stated that with the landmark transaction, doorswere now open for Pakistans corporates to raise financing against future cash flows.Rashid Ahmed, CEO of Trust Investment Bank - the originator, mentioned thatsecuritization of his companys lease receivables would usher in a new era for leasingbusiness in Pakistan. National Discounting Services Ltd (NDSL), a subsidiary of theNational Bank of Pakistan, is the trustee for the Asset Backed Certificates (ABCs) issuedby the SPV.Project Thesis 40
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan4.1.5 REAL ESTATE SECTOR(ASSOCIATED CONSTRUCTORS LIMITED)Nature of TransactionFuture flow securitization of receivables arising from a construction projectIssue Amount: Rs. 100mTenor: 30 monthsPlacement Type: PrivateOriginator & Servicer: Associated Constructors LimitedPrimary Obligator: Pakistan Defense Officers’ Housing Authority.SPV Trustee: Crescent Leasing Corporation LimitedInvestor Trustee: First Dawood Investment Bank LimitedOverview of the OriginatorACL was incorporated in 1966 as an unlisted public company engaged in the business ofcivil engineering and construction and has completed multifarious projects includingconstruction of power and industrial plants, road and bridges, transmission, lines, oil andgas field development, salinity control etc.Transaction Summary:The proposed ABS Certificates amounting to Rs. 100m will be issued by DevelopmentSecuritization Trust (DST), a Special Purpose Vehicle (SPV) formed under the AssetBacked Securitization Rules 1999. The issue is securitized against designated future flowreceivables arising from the contract for six towers of Creek Vistas Towers in the CreekCity Project being executed by Associated Constructors Limited (ACL), the originator.The contract agreement of the project is with the Pakistan Defense Officers’ HousingAuthority (DHA). The proceeds of sales of receivables will be utilized by ACL in thepurchase of specialized construction equipment for the project.Future receivables, i.e. 40% of the originator’s present and future receivables based uponthe contract excluding the receivables that have already been realized prior to the closingProject Thesis 41
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistandate, are expected to amount to around Rs. 477.72m. They will be routed through acollection account to be maintained by the SPV trustee from which deductions will bemade for payments to the investors. A reserve fund equivalent to one installment willalso be created initially from the proceeds of the certificates. It may be increased to twoinstallments by the SPV Trustee if for two consecutive months project gross cash flowsfall short materially from the Projected Service Schedule provided by ACL. An exclusivecharge on the equipment being bought by ACL will form the security againstperformance risk. The ABS Certificates will have a tenor of 30 months including threemonths initial grace period on principal and interest payments. Debt servicing will be inquarterly installments with nine equal principal repayments at a rate of KIBOR + 4%with a floor of 7.50% and no cap.Rating Rationale:The rating of the ABS Certificates is based on the quality of receivables, the structure ofthe transaction and the credit quality of ACL. In the absence of a potential backupservicer, cash flow generation is dependant upon the performance of the originator incarrying out the contract. The assigned cash flows are projected to provide over-collateralization of over 4.0x to debt servicing requirements to cover the risk of both timeand cost overrun. Where cost considerations are considered, ACL is of the view that itwill benefit from the subsequent reduction in prices of non-pass through items. Presenceof a reserve fund is an additional source of comfort. ACL possesses diverse and vastexperience in carrying out construction activities. Our meetings with their past customersalso established that they enjoy a sound reputation in terms of quality and reliability.However this is the first time they are venturing into a residential project of thismagnitude. Currently, this is the sole major project in which they are involved. ACLoperates at a very low debt leverage level in view of erratic cash flows associated withthe construction business and has been assigned entity ratings of BBB-/ A-3. Category Latest Previous ABS BBB- BBB- * Certificates Sept. 27, ‘04 Sept. 08, ‘04 Outlook Stable Stable* PreliminaryProject Thesis 42
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan4.1.6 PETROLEUM SECTOR:(ORIENT PETROLEUM INC. – PAKISTAN BRANCH)Nature of TransactionSecuritization of future receivables i.e. proceeds of sale of gas and condensate productionof designated fields of Orient Petroleum Inc.-Pakistan Branch.Issue Amount: Rs. 1 billion + 500 million green shoe option.Tenor: 5 YearsOriginator & Servicer: Orient Petroleum Inc. Pakistan Branch.Primary Obligator: National Refinery Limited. Pakistan Refinery Limited. Sui Southern Gas Company Limited.Trustee: To be decidedOverview of the OriginatorOrient Petroleum Inc. is incorporated in the state of California, United States of America,with the Head office in Houston, Texas and a branch office in Islamabad. The Pakistanbranch in engaged in exploration, drilling, production and sale of petroleum, natural gasand LPG. The company was taken over by Hashoo Group in 1995. It is joint ventureoperator in the North Porwar, Soan, Ratana, Mirpur Khas and Khipro PetroleumConcession blocks and is a partner in non operated Meher Block of Petronas Carigali andSinjhoro Block of OGDCL where recently six discoveries were made.Transaction Summary:The proposed TFCs of Rs. 1,000 m with Rs 500m green shoe option will be issued byNaimat Basal Oil & Gas securitization Company Limited (NBSC), a Special PurposeVehicle for a tenor of five years. These are backed by the US dollar denominated futurereceivables, with a cap of Rs 2,041 billion, arising from the sale of upto 0.52 MMBO ofcondensate and 38.80 BSCF of gas from three producing fields i.e. naimat Basal, SirajSouth and Ali, where Orient Petroleum Inc. – Pakistan branch (OPI) is operator.Project Thesis 43
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of PakistanSuibsequent to the early well testing currently underway, the Government of Pakistanwill assueme the role of the primary buyer of the production of the designated fields.GOP will in turn assign this production to National Refinery Limited and PakistanRefinery Limited (condensate) and Sui Southern Gas Company Limited (gas). Thesecompanies will make direct payments into the collection account to be operatedexclusively by NBSC for monthly debt servicing and for meeting its administrationexpenses. A reserve fund equivalent to three installments principal and interest paymentwill also be maintained. It may increased on NBSC’s discretion to a maximum of sixinstrallments equivalent payments, if for two consecutive months the production in thefields falls below the “Projected Production Schedule” (PPS) provided by OPI by 15% ormore.Debt servicing will be in monthly installments with 3% of the principal to be redeemedin six months and remaining 97% in 54 equal monthly installments at a coupon rate ofAverage Ask Rate of six months Karachi Interbank Offer rate + 2.5% with a floor of7.50% and a cap of 13.00%. The TFCs will be listed on the Karachi Stock Exchange.Rating Rationale:The ratings are based on the quality of receivables, the structure of the transaction andthe credit quality of OPI as servicer and originator. • The bankruptcy remote nature of NBSC arising from its legal status as an SPV with limited scope of operations and true sale of assigned future receivables to NBSC. • The projected cash flows fro the assigned producing fields provide over collateralization of around 3.0x to debt servicing requirements to cover the risk of adverse fluctuations in production level, price and the exchange rate. Also the projections have been based on very conservative price assumptions. • Presence of reserve fund. • Assured market for gas and condensate production due to the limited market supply and strategic importance of the product. • The quality of the receivables has been assured with good track record of performance of the buyers.Project Thesis 44
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan • If OPI is unable to continue production for any reason, there is high probability that the GoP will assign a Back up operator to ensure steady production flows due to the strategic nature of the asset. • OPI is involved in exploration and production activities in Pakistan and operates with a sound technical team. It has substantial proven recoverable reserves which are expected to generate strong cash flow stream during the next ten years. OPI’s medium to long term entity rating is A (single A) while short term rating is A-1 (A One). Category Latest Previous TFC-S* A+** N/A Rs. 1,500m SEP 13, 04 Outlook Stable N/A *Securitized **Preliminary4.1.7 PAKISTAN INTERNATIONAL AIRLINES:Pakistan International Airlines has struck a deal with Citibank for securitization ofdomestic aviation future flows but the transaction has not been successfully executed.The sources at Pakistan International Airlines have not revealed the information due tothe secrecy regarding the events.However, it is concluded that all the other securitization transactions have been carriedout successfully and satisfactorily which shows its strong status in the Pakistani market.4.2 FITCH RATING FOR PAKISTANI ENVIRONMENT FOR SECURITIZATION:International Special Report: Structured Transactions in Emerging - MarketStress—Update 20031998 CrisisFollowing its nuclear tests in May 1998, Pakistan was immediately hit with internationaleconomic sanctions and a suspension of multilateral lending. As a result, the governmentProject Thesis 45
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistanwas under severe pressure because of its dependence on bilateral assistance andmultilateral agency financing for a significant portion of its external borrowing. Byfreezing private-sector activity, Pakistan tried to stave off a sovereign default, but byAugust 1998, the government had defaulted on external debt payments to certainbilateral and commercial creditors. By November that same year, Pakistan defaulted on aeurobond interest payment. During 1999, the government of Pakistan restructuredUS$877 million in commercial loans and negotiated a rollover of US$3.3 billion incredits under the Paris Club. Additionally, the International Monetary Fund (IMF) agreedto a US$1.5 billion loan.Recovery Since 2001Although Fitch has never maintained a sovereign rating for Pakistan, if a rating wereassigned in 2001, it would likely have fallen in the ‘CCC’ range. This rating would havebeen based on the relatively weak balance of payments and fragile external liquidity atthe time. However, since late 2001, Pakistan has been readmitted to the internationalfinancial community, enjoys good relations with the United States and is fully engagedwith the IMF and the World Bank. If Fitch were to again consider a sovereign rating, itwould more likely fall in the ‘B’ range. Other improvements in the country are due to thenew civilian government, elected in October 2002, which has provided much greatermacroeconomic stability. The balance of payments has been transformed by acombination of external debt relief and high levels of remittances and private capitalflows from abroad. International reserves now stand at a historical high of US$8.8 billion(as of February 2003), compared with barely US$1 billion in mid-2001. The newgovernment has also remained broadly on track with the IMF program and professes tobe committed to a broad range of structural reforms. Still, public and externalindebtedness remain high, and tax reform, financial sector reform and privatization arepressing issues. Additionally, there are risks involved with a new government strugglingto establish a track record against entrenched, vested interests and rising populistpressure. Political stability in Pakistan is still tenuous, and security risks remain high inrelation to both Afghanistan and India.Project Thesis 46
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan4.3 SUMMARY OF ASSET BACKED SECURITIZATION IN PAKISTAN:From all the discussion in the form of case studies on various sectors regarding the asset-backed securitization in Pakistan, it can be summarized that sovereign risk (political risk,legal risk, currency devaluation risk) credit risk and liquidity risk are faced by all thecompanies in the sovereign countries in which they operate as the countries come undereconomic stresses. The sovereign will take actions that might interfere with thecontinued operations of the company. These risks create a cap on the ratings of theissuer. However this risk is not a constraining factor for companies domiciled in highlyrated countries.The driving force in the development of future flow securitization structure was the needto mitigate sovereign risk for highly rated issuers in emerging markets. After successfulmitigation of sovereign risk, the structure will be reliant on the originating entity tocontinue to produce the product or services that will generate the hard currency cashflows necessary to pay the interest and principal on the transaction. The asset generationrisk inherent in these deals means there is a component of credit risk associated with theissuing institution.From the above discussion and the information taken from the visit to variousorganizations it has been noted that the government has tried its level best to achieve thesovereignty in the country so that the conducive environment for the business can bemaintained. There was more focus on the political stability, the stability in economicpolicies for the businesses, the more regularized laws in the country and the economy hasbeen controlled and directed in a much planned manner. The ultimate goal was toachieve the business friendly environment where innovations can be brought, encouragedto get implemented for the growth and stability in the country. It can also be cleared fromthe above illustrations that more asset backed securitization transactions have beenexecuted successfully after regulating the economy. This shows the investors confidencein the economy, business activities and other investment venues. Now the people aremore interested to come up with innovative solutions to accelerate the growth pace in theProject Thesis 47
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistancountry. The laws relating to various business activities have been revised and everything is likely to put in a planned way.This research outcome identifies not only the implementation of the Asset backedsecuritization in other business sectors including Railways, Pakistan InternationalAirlines, WAPDA, SNGPL, Toll receivables, Leasing companies and Insurancecompanies but also the development of Mortgage Backed Securities market in thePakistan, establishment of Fixed income market in Pakistan for the banks and DFIs’. Theasset backed securitization should continue the future receivable including Credit CardReceivables, Trade Receivables, Revenue Receivables, Automobile Leases, Futureroyalties, Bridge Tolls and Rent & Income ReceivablesThe future however, is encouraging following the 2002 Guidelines. DFIs are preparing toconsolidate the market while the SECP assures the facilitation of a strong MortgageBacked Securitization market having registered a 75% increase in bank housing financeschemes since the issue of the guidelines in November 2002. There are also indicationsfrom the SECP and a Japanese holding company towards negotiating the securitizationof small & medium enterprise receivables which analysts say, promise higher yields.Recent technical assistance by the Asian Development Bank has enhanced capacity togenerate revenue amongst SMEs which capture a fairly large export market in Pakistan.Project Thesis 48
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan CHAPTER FIVE SUMMARY OF FINDINGS AND CONCLUSIONProject Thesis 49
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of PakistanCHAPTER NO 5: SUMMARY OF FINDINGS ANDCONCLUSION5.1 SUMMARY OF FINDINGSThe findings of the research conducted are: 1. The motivation regarding adopting the asset-backed securitization was to raise cash, improving the working capital for the business, paying of the huge debts and borrowings, managing the position of balance sheet by improving the assets and liability position of the company. 2. Asset-backed Securitization has improved the credit rating of the companies as the liquidity and profitability position improves. 3. The future flows of receivables are available today at lower cost than the other borrowings so it attracts the originators of the securitization. 4. This availability of the cash improves the liquidity position of the company and it enables the company to meet its operational expenses and further expansion by investing in the capital assets. 5. The Securities and Exchange Commission of Pakistan and State Bank of Pakistan has designed and supported to implement the innovation solutions for the business risk so it has become attractive to the companies to adopt new solutions for the growth of the business. 6. This has improved the asset and liability management structures of the companies as the companies can pay its outstanding loans and provisions. 7. There is a credit risk involved in this mechanism; to deal with; a surplus fund has been created to get assured the payment from the originator. 8. On the basis of quality of the receivables the credit rating is done so that investors may be well clear about the financial and operational conditions of the companies.Project Thesis 50
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan 9. The improved credit rating helps the company in carrying the future businesses of the company and also increases the lines of credit. 10. There are still up to some extent legal issues for example taxation issues which have not been addressed by the regulatory authorities i.e. Central Board of Revenue, Securities and Exchange Commission of Pakistan and State Bank of Pakistan. 11. There is a Successful completion of transactions of Pakistan Industrial Leasing Corporation and the Pakistan Telecommunication Transaction is nearly to be completed. 12. There is a successful implementation of asset backed securitization in Pakistan as all the companies are effectively managing according to Securities and Exchange Commission of Pakistan requirements for it. 13. There is an encouraging position of asset backed securitization in Pakistan as the capital market is going to be expand and the KSE 100 index crossed the 7000 points which ultimately showing the investors’ confidence over the corporate sector performance and more satisfaction to the overall economic position in the country. 14. The success of the asset backed securitization has led the development of Mortgage Backed Securitization in Pakistan. As a result of this, the Government, Banks, Development Financial Institutions and other private sectors are encouraged and attractive to design the legal framework to carry out the mortgage backed securities of house financing and other mortgages in Pakistan.Project Thesis 51
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan5.2 CONCLUSIONPakistan is expected to see a marked increase in structured finance and successfultransactions would inevitably spread out over a broad range of sectors. The call toforeign investors to inject funds and repatriate profits rings out clear as ever as the newlyelected government tries to exercise its mandate. The growing market of tradingcorporations, banks, extractive industries and manufacturers has begun engaging legalcounsel and accountants to carry out feasibility studies and documentation for a varietyof future flows including oil & gas royalties and credit card receivables. Although therecent divestiture by Fitch and the IFC from PACRA may be cause for concern, theSECP is confident that good governance and rating processes installed at PACRA andJCR-VIS are sufficient to secure the investor. This has led the development and stronggrowth of Asset-Backed Securitization in Pakistan. As the investors’ confidence hasbeen regained therefore they are interested to invest in the innovative financialinstruments in the market. There is an increasing trend of asset backed securitization inPakistan from the last three years; the main reason is the existence of the securitizationrules and regulations in Pakistan which is providing guidelines for the growth anddevelopment of ABS in the various other sectors in near future.In order to make issues more flexible and affordable for the investors, issuers are addingdifferent features from shelf registration to the green shoe option to TFC structure. Useof shelf registration implies that the issuer can split the TFC issue into tranches, which isuseful for periodic financing requirements of the issuer and also allows optimal pricingof the individual tranche. Similarly, the green shoe option allows the issuer the right toretain the over subscribed portion of the IPO. However, the issuer has to specify theamount it would retain under this option in advance. A very interesting development isthe gradual evolution is the pricing structure of the TFCs. Starting from the plain vanillastructure with fixed coupon rates, the market has witnessed an increasing number ofbonds with floating structures.The prospects for the securitization of existing assets in Pakistan are favorable as the factthat present volume of eligible assets is relatively high. Securitization laws enacted inPakistan in the 1999 have served as catalysts for change, since they have helped spawnthe right environment for credit-originating institutions. Mortgage foreclosures orauctions are not now allowed in Pakistan, and so banks are not participating in theProject Thesis 52
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of PakistanMortgage Backed securitization which is expected to be approved in the near future forthe House Finance and other Loans. Investors are now likely to be more interested ininvesting in MBS and ABS in Pakistan than in the past."5.3 RECOMMENDATIONSThese are the following recommendations for the development and growth of Asset-Backed Securitization in Pakistan: • The Asset Backed Securitization rules are needed to be better defined in the scope of activities. • The Securities and Exchange Commission of Pakistan should allow wider scope for the asset backed securitization i.e. not only limited to the future receivables but also the loans including credit card loans, mortgage loans and auto loans etc. • The taxation issues regarding the Special Purpose Vehicle to be resolved or it should be tax exempted. • The Banks and Development Financial Institutions should be allowed to take part in the asset backed securitization process more freely. • The organizations are to be encouraged to adopt asset backed securitization especially in the Small and Medium enterprises as there is lack of legal framework for the SME’s participation in asset backed securitization.Project Thesis 53
    • The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan REFERENCES AND BIBLIOGRAPHYBOOKS“Financial Instruments, Institutions and Markets” by Christopher Viney.“Securitization: An Innovative Credit Technique” by Hassan Alamgir Sheikh in Journalof Institute of Bankers, Pakistan, March 1999.“Securitization, Asset Reconstruction & Enforcement of Security Interest” by VinodKothari.“The Economy of Money, Banking and Financial Markets” by Frederic S. Mishkin.PERIODICALS“Asset Backed Securitization 1999 Year in Review and 2000 Outlook”, MoodysInvestors Service, January 2000.“International Special Report: Structured Transactions in Emerging- Market Stress—Update 2003, Fitch Rating.”“Rating Reports on Asset Backed Securitization in Pakistan 2004, Japan Credit RatingAgency.”“STATE BANK OF PAKISTAN BANKING POLICY DEPARTMENT BPD CircularNo.31 November 14, 2003 for Asset Backed Securitization.”Quarterly Review of State Bank of Pakistan.INTERNET (Major Search Engines) 1. www.google.com 2. www.encarta.com 3. www.altavista.com 4. www.securitization.com 5. www.pakistaneconomist.comMagazinesPakistan and Gulf Economist.Business Recorder.Business TodayProject Thesis 54