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Hey John!!!
I’ve been going through some past paper securitisation questions and have some doubts. I did read the technical article on this but still confused a bit.
1. Why does a company obtain a swap to switch the A – rated loan notes’ interest? I thought once they sell the loan notes the securitisation has transferred the risk to the loan note holders. If the risk of default has been passed on, why do companies bother with fixing the rate?
2.How do you transform a rental income into a security? Do you take the total cash inflows expected and sell this amount as the nominal value of the security?
3. When a securitisation takes place for rental income (low risk cashflow), does the SPV issue LOAN Notes to raise the cash or some other kind of instrument?
4. In the technical article it states
“Securitisation may be also appropriate for an organisation which wants to enhance its credit rating by using low-risk cash flows, such as rental income from commercial property”
How does Securitisation enhance a comapny’s credit rating?I know there are a lot of questions. But I hope you could answer them. Thank you so much for all the help.
1. Although most of the risk is passed on to the lenders (the subordinated certificate holders are the ones at risk), Moonstar still has some risk – suppose the rental income is lower and LIBOR increases (so without swapping, they would have to pay more to the A rated loan notes) then they could be in the position of not being able to pay the interest on all of the loan notes and being in default.
2. Moonstar illustrates how this happens. Instead of getting the income as at present, they issue the loan notes and receive cash now (just as they would from any issue of debt) and in future the rental income will end up going to the lenders. They are replacing future rental income with a ‘lump sum’ receipt ‘now’.
3. Same answer as for 3 🙂
4. Normally, the more debt a company raises the more risky it is (because of the risk of not being able to pay the interest) and therefore there is the potential to have a lower credit rating. If low-risk income is ‘set aside’ to pay the interest (as in Moonstar, the rental income is being used to pay the interest) then the risk of default on the interest becomes much less and hence a higher credit rating.
Hi John, appreciate your help with below:
(I read through Moonstar topics on the forums and the technical articles but not sure understood correctly)Question 1:
The $200m, question mentioned ” Moonstar co should use 90% of the value of the investment for a collateralised loan obligation”for the remaining 10% of the $200m, is below correct?
-actual funding is done separately, by Moonstar, using other source of finance which not discussed and irrelevant to the question
-To bondholders, this 10% is like a upfront risks compensation for the projectQuestion 2: is below understanding of the overall question correct?
involvement of bank:
In terms of numbers/calculations only, involvement of bank is the service charges of $0.2m * 10 years only, the 10% in question 1 have nothing to do with bankSPV purchased the right to receive rental income from Moonstar (but did not purchase the development itself), using funds raised from Bondholders via securitsation.
Moonstar have the ownership of the development, and have control over the development and SPV.
Liability to pay interest and principal of loan notes is under SPV (ultimately/Moonstar) therefore interest rate risks are to be managed.
Question 3: using Moonstar as an example, looks like no value is created for the shareholders of Moonstar at least for the first 10 years
Thank you.
1. The remaining 10% will be presumably paid from funds that already existed in the company.
2. Correct. The $200,000 is just the costs of administrating the loan. (It is a coincidence that it is 10% 🙂 ) The rest of what you have written is correct.
3. Correct 🙂
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