Loss Given Default Estimation using Transition Matrix (TM-LGD): A Case Study
IFMR Capital recently structured, arranged and co-invested in a Rs. 1,063.8 million securitisation, backed by 105,422 microloans originated by Chennai based MFI, Equitas Micro Finance India Private Limited.
Gamma Pioneer IFMR Capital 2010, the Special Purpose Vehicle created for the transaction, has issued three tranches of securities rated by Crisil, India’s foremost rating agency: a 53% senior tranche rated P1+ (so) that was subscribed to by UTI Mutual Fund, 32% senior tranche rated AA (so) that was subscribed to by HDFC Bank and Reliance Capital and a 15% junior tranche rated BBB (so) that was subscribed to by Reliance Capital and IFMR Capital. The P1+(so) tranche has an expected maturity of 10 months, the AA(so) tranche an expected maturity of 15 months and the BBB(so) an expected maturity of 20 months.
“At Rs. 1.06 billion, this is the largest microfinance securitisation in the sector till date. The size, performance of microfinance securitisations in the capital markets and wide investor base all contributed to a successful placement at about half the credit spread (over the P1+ commercial paper benchmarks) as compared to the previous deal. Microfinance receivables are increasingly being treated on par with other asset classes” says Sucharita Mukherjee, the CEO of IFMR Capital. “This transaction also affirms that capital markets access for high quality microfinance institutions with sound systems and origination processes is indeed robust” she added.
The structure created by IFMR Capital ensures that the incentives of the originator, servicer and structure are aligned. While the originator and servicer, Equitas, provides cash collateral of 9.4% of the pool principal, the structurer, IFMR Capital, has invested in the subordinated junior tranche. The cash collateral and the subordination of payments to junior tranche in the waterfall mechanism ensures that the senior investor is protected against losses upto Rs. 241.6 million. The first losses are met from the cash collateral provided by the originator and the second losses are borne by the subordinated junior tranche investors.
Till date, IFMR Capital has provided more than Rs. 4.90 billion of financing to the microfinance sector in the form of microfinance debt capital market securitisations and senior secured bridge loans. It recently concluded the third in the series of multi-originator securitisation backed by microloans originated by three Indian MFIs.