Debt Finance Techniques forMFIs and Agri-CommoditiesMicrofinance & Sustainable Development Summit<br />January 27, 2010<br />
Outline<br />About IFMR Capital<br />3 Cases <br />Equitas micro-loan securitisation (IFMR Trust Pioneer II)<br />Multi-or...
IFMR Capital<br />Mission<br />“To provide efficient and reliable access to capital<br /> for every institution that impac...
Financial System Design<br />
Our Role in Transactions<br /><ul><li>Pre-purchase
Market intelligence
Due diligence of MFIs based on Underwriting Guidelines
Evaluation of portfolio to be purchased
Structuring the transaction
Modeling expected cashflows
Legal due diligence
Working with the rating agency
Negotiations with the investors
Finalisation of transaction structure
Providing second loss credit enhancement
Post-purchase
Continuous follow-up on underlying portfolio with originator
Market-making in securities issued</li></li></ul><li>Case IIFMR Trust Pioneer IIFacilitating a mutual fund investment into...
IFMR Trust Pioneer II  1st Mutual fund investment<br />Context <br />No deposits or external debt for NBFC-MFIs<br />Regul...
IFMR Trust Pioneer II – November 2009 <br />IFMR Trust Pioneer II<br />
Structure<br />P1+<br />65% of Pool<br />$7 MM<br />Investors<br />Equitas (MFI) sells 55,993 micro-loans<br />ICICI-Prude...
Time Tranching<br />Accessing &lt;1 yr portion of yield curve improved pricing benchmark<br />Commercial paper rated P1+ y...
Case IIIFMR Capital MOSEC IFacilitating access to capital markets for small MFIs<br />
IFMR Capital MOSEC I 1st Multi-originator securitisation<br />Context<br />500+ small & medium sized MFIs (100 million unb...
Loan-to-Originate Product <br />After due diligence, if a small MFI meets Underwriting Guidelines & Eligibility Criteria, ...
IFMR Capital MOSEC I – Summary, January 2010<br />IFMR Capital MOSEC I<br />
Structure<br />P1+<br />76% of Pool<br />$5.2 MM<br />Investors<br />Asirvad<br />Sahayata<br />Sonata<br />Satin<br />Dha...
Case IIIAgri-Terminal Markets Network EnterpriseFacilitating access to markets & credit for small farmers<br />
Farmers’ Dilemma<br />Farmers want price upside:<br />Prices are the lowest at harvest time.<br />Solution:<br />Warehouse...
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Microfinance Summit Presentation - IFMR Capital

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  • Industry utility – creating infrastructure for efficient and reliable flow of capital to high quality originators-Learn from the monolines, guaranty companies’ mistakes in the west
  • November 2009
  • -Banks prefer to lend Jan-March, in time to meet regulatory targets-Bank credit expanding slower than microfinance sector (40% tgt PSL)-$18 billion+ in fixed maturity // liquid plans...ABS mkt was $12 bil in March ‘0-Additional investor scrutiny
  • -Equitas has a 2 year loan product, hence longer dated maturities
  • Implications:New investor base- mutual fund and bank treasuriesLower cost of funds for MFIsMarket standards developing for evaluating the credit quality of micro-loan portfolios originated by MFIsEnhanced transparency and disclosure via capital markets oversight of sectorEmergence of ‘BBB’ demandPrice discovery and liquidity (mkt making, portal)
  • For MFI’s with 1 yr loans, the portfolio can potentially be securitised to access an even shorter term, lower cost portion of the yield curve
  • -Fortnightly payments
  • -Geographic & institutional diversification to investors-Rating agency was more conservative on CC given the quick growth of some MFIs-Treasury desk
  • WRF loan portfolio is very small. It is approx 9-10 customers with Rs. 8.55 lakhs. All loans not repaid. -NSEL offering avg 2-4% better price than Mandi
  • 0:50 branch starts
  • Microfinance Summit Presentation - IFMR Capital

    1. 1. Debt Finance Techniques forMFIs and Agri-CommoditiesMicrofinance & Sustainable Development Summit<br />January 27, 2010<br />
    2. 2. Outline<br />About IFMR Capital<br />3 Cases <br />Equitas micro-loan securitisation (IFMR Trust Pioneer II)<br />Multi-originator micro-loan securitisation (IFMR Capital MOSEC I)<br />Commodity-backed warehouse receipt financing <br />
    3. 3. IFMR Capital<br />Mission<br />“To provide efficient and reliable access to capital<br /> for every institution that impacts low-income households”<br />IFMR Capital is an Indian non-banking finance company (NBFC) functioning as a financial guarantee company, setup in 2008.<br />Sectors of focus include:<br />Microfinance <br />Agri-commodity backed finance (pilot)<br />Small enterprise finance (pilot)<br />Part of IFMR Trust, based in Chennai, India<br />IFMR Rural Finance (Regional rural financial institutions)<br />IFMR Mezzanine Co. (Mezz finance for MFIs)<br />IFMR Ventures (Incubates & invests in rural supply chain companies)<br />
    4. 4. Financial System Design<br />
    5. 5. Our Role in Transactions<br /><ul><li>Pre-purchase
    6. 6. Market intelligence
    7. 7. Due diligence of MFIs based on Underwriting Guidelines
    8. 8. Evaluation of portfolio to be purchased
    9. 9. Structuring the transaction
    10. 10. Modeling expected cashflows
    11. 11. Legal due diligence
    12. 12. Working with the rating agency
    13. 13. Negotiations with the investors
    14. 14. Finalisation of transaction structure
    15. 15. Providing second loss credit enhancement
    16. 16. Post-purchase
    17. 17. Continuous follow-up on underlying portfolio with originator
    18. 18. Market-making in securities issued</li></li></ul><li>Case IIFMR Trust Pioneer IIFacilitating a mutual fund investment into micro-loan backed securities<br />
    19. 19. IFMR Trust Pioneer II 1st Mutual fund investment<br />Context <br />No deposits or external debt for NBFC-MFIs<br />Regulatory driven lending (seasonal, concentrated)<br />Indian mutual funds: seeking short term assets<br />Securitization: how to promote healthy structures?<br />Aim<br />To establish microfinance as a high quality asset class<br />Demonstrate a P1+ rating for a micro-loan backed securitization <br />Legal form: Tradable security<br />Widen sources of finance for MFIs to key capital markets investors such as mutual funds and bank treasuries<br />Set a new pricing benchmark for microfinance securitizations<br />Promote structures that are capital efficient (Par vs premium)<br />Establish market standards for evaluating the credit quality of micro-loan portfolios originated by MFIs<br />
    20. 20. IFMR Trust Pioneer II – November 2009 <br />IFMR Trust Pioneer II<br />
    21. 21. Structure<br />P1+<br />65% of Pool<br />$7 MM<br />Investors<br />Equitas (MFI) sells 55,993 micro-loans<br />ICICI-Prudential AMC, Dhanalakshmi Bank<br />1<br />SPV buys loans and issues PTCs (securities)<br />3<br />Axis Bank<br />AA<br />17% of Pool<br />$1.8 MM<br />2<br />CRISIL (S&P) rates securities<br />BBB<br />18% of Pool<br />$1.9 MM<br />IFMR Capital, <br />Axis Bank<br />Cash Collateral<br />10.6% of Pool<br />Equitas (MFI) bears first loss risk <br />IFMR Trust Pioneer II<br />
    22. 22. Time Tranching<br />Accessing &lt;1 yr portion of yield curve improved pricing benchmark<br />Commercial paper rated P1+ yielded approx 5-6% at time of deal <br />IFMR Trust Pioneer II<br />
    23. 23. Case IIIFMR Capital MOSEC IFacilitating access to capital markets for small MFIs<br />
    24. 24. IFMR Capital MOSEC I 1st Multi-originator securitisation<br />Context<br />500+ small & medium sized MFIs (100 million unbanked households)<br />Indian banks have consolidated lending to largest 10-20 MFIs<br />Cost of borrowing avg 12-15% <br />Small MFIs lack sizeable unencumbered portfolio for securitization<br />Revolver securitization structure not captured by RBI guidelines<br />
    25. 25. Loan-to-Originate Product <br />After due diligence, if a small MFI meets Underwriting Guidelines & Eligibility Criteria, IFMR Capital provides short-term liquidity (2-4 month loans) for MFIs to originate portfolio<br />Portfolio can then be pooled with other small MFIs’ portfolios and securitized <br />-The unencumbered portion of their portfolios is minimal<br />-IFMR Capital issued line of approx $1 MM to each MFI to make fresh loans<br />IFMR Capital MOSEC I<br />
    26. 26. IFMR Capital MOSEC I – Summary, January 2010<br />IFMR Capital MOSEC I<br />
    27. 27. Structure<br />P1+<br />76% of Pool<br />$5.2 MM<br />Investors<br />Asirvad<br />Sahayata<br />Sonata<br />Satin<br />Dhanalakshmi Bank<br />1<br />SPV buys loans and issues PTCs (securities)<br />3<br />Unrated<br />24% of Pool<br />$1.6 MM<br />IFMR Capital<br />2<br />CRISIL (S&P) rates securities<br />Cash Collateral<br />13% of Pool<br />All 4 MFIs bear first loss risk <br />IFMR Capital MOSEC I<br />
    28. 28. Case IIIAgri-Terminal Markets Network EnterpriseFacilitating access to markets & credit for small farmers<br />
    29. 29. Farmers’ Dilemma<br />Farmers want price upside:<br />Prices are the lowest at harvest time.<br />Solution:<br />Warehouse receipt financing<br />Farmers also need liquidity:<br />A need for cash today leads to forced selling at low prices.<br />Solution:<br />Local access to commodity exchanges & end buyers<br />Farmers need market access:<br />Local mandi & middlemen offer low prices vs national exchanges<br />
    30. 30. Access to markets<br />
    31. 31. Access to risk management tools <br />
    32. 32. Access to commodity market and credit<br />Finance partner for loans<br />ATMNE Branch<br />Clearing & Trading member of NSEL<br />Nat’l Spot Exchange<br />4. Provide cash / loan<br />3. Sell or Lodge w/h receipt<br />Farmer / Trader<br />1. Deposits Commodity<br />IFMR Rural Finance or MFI<br />Warehouse / 3rd party Collateral Manager<br />2. Issue warehouse receipt<br />A choice to farmer to sell spot or to hold for future <br />
    33. 33. ATM NE: Dharampur Village, Gujarat<br />
    34. 34. Way forward<br /><ul><li>Sharing of ground level experience and technical expertise learned in pilot
    35. 35. Replication through partnerships with MFIs, NGOs and Cooperative societies.
    36. 36. ATMNE will provide trading and settlement backend to partners
    37. 37. Exploring ways to accredit warehouses for storage of commodities in rural areas and taking grading, sorting and packaging services close to farmers
    38. 38. Short distance commodity transportation pilots to facilitate farm to market as well as inter-markets movement
    39. 39. Transportation exchange to enhance the scope of trade on electronic exchanges</li></li></ul><li>Peter Bremberg<br />Peter.bremberg@ifmr.co.in<br />Team Email<br />capital@ifmr.co.in<br />Website: www.ifmrcapital.com<br />Blog: www.ifmrblog.com<br />1, Cenotaph Road | Teynampet | Chennai - 18<br />www.ifmrcapital.com<br />
    40. 40. Product and Market DevelopmentPricing and Evaluation Framework<br />Perception of due diligence team<br />Evaluation based on benchmarks<br />Scoring is on a 5-point scale: 0, 5, 10, 15 & 20 across each of the above sections.<br />
    41. 41. Product and Market DevelopmentPricing and Evaluation Framework<br />
    42. 42. Click next to see an ATMNE Video<br />
    43. 43. Farmer Education<br />
    44. 44. Trading Platform<br />
    45. 45. Quality Testing of Groundnuts<br />

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