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PRESENTATION ON SECURITIZATION

PRESENTATION ON SECURITIZATION. NATIONAL HOME MORTGAGE FINANCE CORPORATION. Securitization is the process of legally isolating existing asset pools or future generated assets away from the company originating the receivables (“originator”) Isolation of assets through legal “true sale”

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PRESENTATION ON SECURITIZATION

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  1. PRESENTATION ON SECURITIZATION NATIONAL HOME MORTGAGE FINANCE CORPORATION

  2. Securitization is the process of legally isolating existing asset pools or future generated assets away from the company originating the receivables (“originator”) Isolation of assets through legal “true sale” SPE simultaneously issues securities to finance the purchase of the asset pool Historical information is essential to analyze the performance of the asset pool Historical data determines the necessary amount of credit enhancement required in respect of the ratings of ABS notes that will be issued Cash flows from the asset pool can be tranched into various classes of debt that have different repayment characteristics Senior, mezzanine and subordinated tranches determine payment priority What is Securitization? PRESENTATION ON SECURITIZATION

  3. What Can Be Securitized? Any pool of existing assets that has a predictable cash flow can be securitized: • Residential Real Estate Loans • Commercial Real Estate Loans • Real Estate Long Term Leases • Auto Loans and Leases • Equipment Loans and Leases • Student Loans • Commercial and Industrial Loans • General Consumer Loans • Trade Account Receivable • Credit Card Receivables • Franchise Payments • Capital Commitments • Closed End Funds • Whole Business • Collateralised Loan / Bond Obligations (CLO / CBO): • Bank Loans PRESENTATION ON SECURITIZATION

  4. What Can Be Securitized? Assets that are expected to generate future cash flows can also be securitized: • Export Receivables • Oil / Gas / Commodity Receivables • Net Telephone Payments • Airline Ticket Receivables • Electricity Bill Receivables • Water Bill Receivables PRESENTATION ON SECURITIZATION

  5. Who Are The Originators? • Banks • Large Local Corporations • Non-Bank Financial Institutions (e.g. finance companies, leasing and insurance companies) • Property Companies and REITs • Multi-National Companies • Governments PRESENTATION ON SECURITIZATION

  6. Advantages of Asset-Backed Securities • Access to debt markets for borrowers: Securitization enables borrowers (home buyers, etc.) to obtain funding from financial markets that they could not access as individuals. • Efficient pricing of debt: Since asset-backed securities are constructed by combining similar quality loans into a single portfolio, the credit risk of the loans in the pool can be evaluated more accurately. • Reduction of the issuer’s leverage: Since the sale of the asset-backed securities is viewed as a sale of assets, the Financial Institution (FI) issuing the ABS does not show an increase in debt outstanding.

  7. 4. Lower capital costs for the issuer: the issuing Financial Institution (FI) does not need to hold capital against the ABS since the sale of the ABSs reduces the FI’s assets. 5. Generating Fee Income: The FI issuing the ABS transforms risky net interest income earned from lending (the difference between income received on fixed rate loans and the income paid on the source of funds to finance the loans, which fluctuates as the cost of funds fluctuates) into a steady stream of servicing fees. 6. Risk Reduction: The issuing FI’s risk exposure is reduced as assets are transferred off the FI’s books and credit enhancements are utilized.

  8. Reduced Cost of Financing: The portfolio risk diversification and liquidity benefits of the pool of assets are passed along in the form of reduced risk adjusted required rates of return paid by borrowers. • Increased Balance Sheet Liquidity: By packaging individually illiquid loans into marketable securities, the FI increases liquidity of its assets.

  9. Portfolio of assets Credit enhancement Principal & interest payments Sell assets Issue securities Originator & Servicer Issuing entity (“SPV”) Investors Proceeds from sale of receivables Proceeds from sale of receivables Securitization Structure PRESENTATION ON SECURITIZATION

  10. The Originator sells or transfers the portfolio of assets to an SPV The SPV raises funds from investors by issuing a bond or taking a loan The SPV uses the funds to pay the Originator for the sold assets The SPV separates the credit risk of the asset pool from the Originator During the life of the transaction, the cash flow from the assets is used to make payment of principal and interest to investors for the bond or the loan of the SPV Generally, the Originator will remain as the Servicer of the receivables Securitization Structure PRESENTATION ON SECURITIZATION

  11. Monetization Transaction Structure Investors Asset Manager Trustee Payments Assets SPV Notes Lease payments Sale of Assets Proceeds of sale Originator Long-term right of use PRESENTATION ON SECURITIZATION

  12. Tranching a Pool of Assets Ineligible assets 100% 90% 80% AAA Senior Notes 70% 60% Increasing credit quality 50% Eligible Assets Pool of Assets 40% BBB 30% Subordinated Notes BB 20% 10% Retained Equity 0 PRESENTATION ON SECURITIZATION

  13. Assets Auto loans Lease receivable Mortgage loans Consumer loans (i.e. tax loans, installment loans) Structuring Issues Static Pool Statistics (losses) Asset pool yield Pass-through vs pay-through Net losses vs gross losses Sale of Rec. Seller SPV AAA Investors $ $ Deferred Purchase Price Outstanding Php Collateral Pool Senior ABS X Yrs Time Amortizing Structures PRESENTATION ON SECURITIZATION

  14. Bankruptcy Remote Vehicle Protects Investor from Originator Towards a Higher Rating Ring-Fencing Assets Credit Enhancement • Internal • Excess Spread • Subordination • Overcollateralization • Reserve Fund • External • Guarantee • Letter of Credit • Swaps coverage for currency and interest rate risks Rating Early Amortization/ Performance Triggers • Protects investors from adverse credit developments PRESENTATION ON SECURITIZATION

  15. Excess spread Net income or excess cash flow generated from receivables provides the first level of credit enhancement Subordination Interest and principal that would have otherwise been distributed to a subordinate class is re-directed to more senior classes Overcollateralization Face amount of loans/receivables in the collateral portfolio is greater that the face amount of securities issued Reserve Fund / Spread Account Cash that is deposited and/or captured in a designated account Letter of Credit/Insurance Guaranty A highly rated bank/insurer guarantees principal and interest payments to bondholders Credit Enhancement PRESENTATION ON SECURITIZATION

  16. Proposed Transaction Structure Originator PRESENTATION ON SECURITIZATION

  17. Third parties and their roles

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