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Chapter 8

SECURITIZATION

 

by josavere

1. DEFINITION

Consists of a financial mechanism for attainment of cash using like endorsement actives, which allow generating cash flow through an independent patrimony that is constituted by means of a contract of fiduciary, against which titles values are emitted. In agreement with resolution 400/95 of the National Supervision of Values; usually is possible to secure:

  • Real estate assets
  • Account receivables
  • Titles enrolled in the national registry of values and financial intermediaries
  • Contracts of renting
  • Titles of public debt

In general, cash flow of predictable behavior with base in statistics of three years consecutive as the collection of tolls, taxes, collections of public services, etc. For the cover of the interests it can be used for external flows, that is to say, generated by sources different from the internal goods object of security or flows when this is generated in a mercantile contract, in which the goods are operated commercially.

It is a recent system in the financial world; In the U.S.A. it appeared around 1970 and nowadays, it presents/displays a very important percentage of the total of the sector; in England the mechanism is been operating from 1988 and the Japanese, through their filial bank in the U.S.A. are using it; in Spain its development began and Mexico is the leader country in Latin America.

 

 

2. ILLUSTRATIVE GRAPHIC OF SECURITIZATION

The total value of the assets is divided in fees (representative titles), which are emitted at your service, which indicates that they can be transferred by means of endorsement and delivery of the title through stock-market of values.

 

A. PARTICIPANTS:

a. Originator: it is the possessor of the good susceptible to secure to generate cash. It can be a natural or legal person, of public or private, national, foreign or mixed nature. In the case of special common founds or values it does not have an originator. The securitization initiative also can start off from the public investor.

b. Handling Agent (Fiduciary): it is the organization that is in charge to direct the process by means of a mercantile contract fiduciary or a fiduciary order. He carries out the management necessary to maintain the goods secured and collects the yields generated. He is responsible for the execution and he receives a commission from his work, which is the means and not the result.

c. Organizer of the Process: designs the transfer by means of financial calculations and of market according to the legal aspect. It can be the same originator, or the agent of handling (fiduciary) or a third party.

d. Broker: is in charge of the sale of the titles in the market; it can be the same agent that handles (fiduciary organization) or a stockbroker. It receives a commission.

e. Investors: all the ones that act in the financial market including ordinary common funds and funds of values and the institutional ones.

f. Assessing of Risks: it is a company/firm specialized firm in the matter, properly authorized by the national Supervisory of Values, that certifies objectively the level of risk of the operation, which must be minimum. The safest titles are triple A; C are those that represent more risk.

Qualifications:

  • AAA: maximum (minimum risk)
  • AA: almost maximum (minimum risk)
  • A: low risk
  • BBB: suitable risk
  • BB: smaller risk
  • B: high risk
  • CCC: high risk in smaller degree
  • CC: high risk in average degree
  • C: high risk in high degree

When we say that the originator or owner creates an independent capital with the goods to secure, it means that these cannot be persecuted by the creditors of the originator. Transferring agent by means of contract of fiduciary mercantile to independent handling (organization fiduciary), who supports the obligations correlative to the rights of the titles that are emitted, to be acquired by the investors, who also, can negotiate them in the stock market. In the public case of fiduciary transference does not become of dominion nor constitution of an independent patrimony.

Nevertheless, the law of administrative hiring determined that for effects of securing actives, independent patrimony must be constituted.

The fiduciary manager of the independent patrimony as if the owner but without entering it to his own assets; must maintain them separated from his assets and the others that are find given in fiduciary and must make the accounting separately. It cannot change the destination for another for which specifically the contract is made. The investors receive titles that can be:

a. Of Participation: in which case in addition to the patrimonial right the profits or losses participate in that which the business generates.

b. Of Credit Content: the independent patrimony is committed to cancel a determined number by the capital contribution to more interests in the terms and conditions indicated by the title.

c. Mixed: in which, in addition to the rights of the participating title they can be secured or to have a yield.

The independent patrimony is increased with all the profits that it perceives by any concept (canons of renting, yields, insurances, etc.). They must establish mechanisms for security against the inherent risks, with founds of stabilization and reserve, insurance policy etc.

 

B. STRUCTURING OF THE FLOW OF CASH: from the financial point of view, it constitutes the base of the process and it is prepared relatively easy. In effect, by definition, the assets are secured that   generate a predictable flow with high degree of certainty, that is to say: renting, interest, mortgages, portfolios of little risk etc. The debits are still more predictable (commissions, yields, expenses etc.) and base on the spreadsheet the calculations are facilitated enormously.

 

C. COSTS IN THE SECURITIZATION: the following:

  • Commercial estimate of the assets
  • Commission for the fiduciary organization
  • Value of the structuring fees
  • Commission by sale of titles (positioning)
  • Inscription in the national registry of values
  • Payment of rights of public supply
  • Payment of rights of inscription in stock market
  • Payment of notary rights, rents and registry
  • Payment of fees to the examining company/firm of values
  • Costs of printing of titles
  • Publicity

 

D. CRITERIA TO DESCRIBE RISKS:

a. The expectation of long term valuation: location, conditions of use, maintenance, development of the sector, commercial dynamics, flexibility, facilities of access, public services, destination, etc.

b. Which generates rent: (the repurchase figure can occur) which must perfectly be quantifiable and to be very stable.

c. Certainty of income: by definition of the mechanism. Of the qualification of the level of risks a specialized company/firm is in charge. In case of a crisis, a securing could be used for an operation of rescue; we talked about goods without which it will be impossible to recover the company.

 

E. ADVANTAGES:

a. It allows the gaining of cash with immobilized assets or predictable future flows.

b. It does not require financial intermediaries whose cost is very high.

c. It does not demand constitution of mortgages, nor imposed of legal rights.

d. The participation of foreign investors allows to obtain strong currencies.

e. It is an agile mechanism.

f. It facilitates the money gain in the long term.

g. For the investor it represents a very safe and liquid opportunity, because the independent patrimonies that are constituted are administered by a fiduciary and, in addition, can be negotiated in the stock markets.


F. GENERAL ASPECTS OF SECURING MODALITIES:

a. Credit Portfolio: in addition to the general norms a guarantee is demanded which covers 300 % with the index of losses, according to statistics of the last five years, which can be offered by the originator or be contracted with an external agent.

It consists of yielding the rights to the payment of the main one and of yields, to the investor who makes the purchase. The cash flow generated by the mobilized portfolio must be predictable and credits must be homogenous, that is to say, that it corresponds to a same class: consumption, commercial, mortgaging.

b. Real Estate: it consists of the transfer of titles on constituted independent patrimonies with real estate. Two technical estimates of independent societies, study of titles, and insurance policy against all the risks are demanded.

c. Construction Projects: in this case titles against an independent patrimony conformed by a vacant lot are emitted and with two technical estimates. Technical study must appear that demonstrates the viability of the project to develop by a company/firm with trajectory superior to five years and that previously constitute policies of fulfillment with interventory of a recognized and independent organization.

originator, because the process is initiated by the fiduciary (handling agent), with money of the investors is not required. The investments will have to be evaluated by the managing agent, are due to contemplate mechanisms of protection for the assets, which only can emit participation titles.

 

e. Others: for which it exists a specific regulation, that is recommended to consult when it is required. It is the case of infrastructure works and public services, road networks, leasing contracts and titles of public debt.

 

Example:

TITLES OF REAL ESTATE PARTICIPATION EMITTED BY INDEPENDENT PATRIMONY CADENALCO 75 YEARS

The main object of the independent patrimony consists of which Cadenalco S.A., for a reason or purpose transfers of irrevocable Mercantile Fiduciary real estate where it operates the Superley of San Diego located in the city of Medellín. Also, in the month of January of 1998, Fiduciary Sufibic S.A. will add by irrevocable instructions of Cadenalco S.A. and of irrevocable Mercantile Fiduciary the building in which it operates the Superley Salitre located in the city of Santa Fe de Bogota D.C. to the same Independent Patrimony in order that it serves as a base for the securing process.

TITLE CLASS: Titles of real estate participation Cadenalco
AMOUNT: Five million four hundred thousand titles (5.400.000)
NOMINAL VALUE:

Ten thousand pesos ($10.000)

MINIMUM INVESTMENT:

Fifty titles (50)

CIRCULATION LAW: At your service
PRICE SUBSCRIPTION:

Ten thousand pesos for the first section and Ten thousand pesos for the second section by each title

AMOUNT OF THE SUPPLY:

Fifty four billion pesos

POSITIONING TERM:

Fifteen months from the first warning

INDEPENDENT PATRIMONY CADENALCO 75 YEARS
The originating Society is the proprietor of both real state, who stops all the effects of this prospect of positioning will denominate Superley generically San Diego and Superley Salitre, which are made up of several buildings as well.

The originating Society Cadenalco will initially transfer Fiduciaria Suramericana y BIC S.A.. Sufibic for a reason or purpose of irrevocable Mercantile Fiduciary in agreement with the conditions that settle down, the building of Superley San Diego. Of base in this building transfer they will take control of the first section consisting of the transfer of 27,000 million pesos. The investors who acquire titles of real estate participation Cadenalco of this first section will have a right of preferential subscription on the second section under special conditions, which will occur to show in the notice of the supply.

 

INDEPENDENT PATRIMONY
Constituted by the buildings described in the contract of Mercantile Fiduciary. Additionally they will be part of the Independent Patrimony to receive fees of money like rent rate, the fees that the originating Society possibly must pay by the anticipated completion of the renting of the buildings, the recognized ones by the insurance companies related to the payment of claims by an act of god that could happen, the received ones because of the sanctions that settle down through the contract of Mercantile Fiduciary, the yields generated by them and in general any fee of money received by the independent patrimony to any title.

 

FIDEICOMITENTE OR ORIGINATOR
GREAT CHAIN OF COLOMBIAN WAREHOUSES S.A. CADENALCO, that in its quality of titling legal of the real estate assets are described, below will carry out its transference of irrevocable Mercantile Fiduciary for a reason or purpose, with the intention of conforming to them the independent patrimony before mentioned by the Society, with position to which the titles of real estate participation Cadenalco will be emitted object of the present process of real estate securing.

 

FIDUCIARY OR AGENT OF HANDLING
It is Fiduciaries Suramericana y BIC S.A.. SUFIBIC S.A., which fulfill the fiduciary functions and act as agent of handling in the contract of Mercantile Fiduciary, so and as it settles down in the second numeral of article 1,3,3,1 of resolution 400 of 1995 emitted by the Supervisory of Values; It will emit the titles developing of the securing process, will collect the originating resources of this transfer and it will tie legally with the investors, on behalf of the Independent Patrimony, constituted by the contract of Mercantile Fiduciary according to the rights that incorporate the titles.

 

BENEFICIARIES
The originating Society is the beneficiary of the resources collected by means of the transfer and later subscription of the Titles of real estate Participation Cadenalco that will be placed in the public market of values. The natural, legal investors people and founds of Values, are beneficiaries of the rights that confer the Titles to them of emanated Real estate Participation Cadenalco of the securing process.

 

RENTING
The Agent of handling will grant to the originating Society the use and we for a reason or purpose enjoyed renting of the buildings in exchange for a canon and under the terms and the conditions that in the mercantile contract of fiducia are stipulated.

Until the first notice of supply is not published, the originating Society will for a reason or purpose keep the buildings was renting, which will finish when the mentioned notice of supply is published, restituting the goods to the independent patrimony. This renting will be governed in all its other aspects in agreement with the rules of the Civil Code for this type of contracts, thus it will not be governed by an independent contract.

 

RENT RATE
As counterpart to the use of the buildings, the originating Society will pay to the agent of Handling a monthly fee equivalent to the zero point seventy three percent (0.73%) of the initial commercial value according to the practiced estimate 17 of April of 1997 by the Market of real state of Medellín, that will be increased annually with base in the IPC plus the two percent (2%) of the fees received by concept of income by net sales of the establishment of commerce established by the originating Society in this building.

The new value of the building, that is to say, the value of the goods once practically revaluated, will be increased annually with base in the IPC plus a point, plus the two percent (2%) of the fees received by concept of income by net sales of the establishment of commerce established by the originating Society in this building. These fees will be paid thus: The corresponding thing to the percentage on the commercial value of the goods will pay in a month advance during the first ten (10) days of every month.

The equivalent thing to the percentage of income by net sales will be paid with a fee, in amount advance, within the first ten (10) days of every month with base in the income by net sales obtained by each store in the same month of the immediately previous year. This fee will be increased in the IPC of last the twelve months certified by the DANE. Also one will adjust within the respective month, properly certified by the fiscal reviewer of the originating Society and it will be paid within the ten first days of the third month.

For all the effects of the Contract of Mercantile Fiduciary, it is understood by income of net sales of the commercial stores, the obtained thing by gross sales, except the IVA, the returns, reductions, discounts and failures, plus the net sales of the concessionaires. The delay in the payment of more than a fee or canon during the course of the last year, will give right to the Agent of Handling to receive interests, moratorium to the Maximum rate allowed by the Bank of the Republic. The handling agent will be able to end the contract and to demand the immediate delivery of the buildings rented with the single fact of to have required three consecutive times to the originating Society, by means of written communications in which they notify itself on the occurrence of the three breaches of contract, which this one has incurred in the canon payment.

It will be understood that the originating Society incurs in a delay if the payment within the ten first days of the month has not taken place.

 

AVAILABLE RESOURCES
Income by concepts of rent rate corresponding to the respective period of collection. Generated financial yields, including until the day of the date of payment, by the income obtained by the Independent Patrimony.

 

COLLECTION ACCOUNT
The agent of Handling will open an account, or checking acct, of savings acct or in an Ordinary Common fund through which he will collect all the resources of the Independent Patrimony by concept of rent rate and the other income that it will receive.

 

RESERVE FUND
the Agent of Handling will create a Reserve fund with a percentage on the resources that he collects by any concept. With position to this fund, the Agent of Handling will have to pay to all the expenses and costs in charge of the Independent Patrimony. The resources of this fund will stay in accounts or separated orders and will be constituted with a monthly fee equivalent to the ten percent on the income received by any concept.

 

DATE OF PAYMENT
the distribution of the resources derived from the payment rent rate and the yields of these, once discounted to all the expenses and costs of the Independent Patrimony, will be made in quarterly fees form within the first five days of the month of April, July, October and January proportionally of the index of participation of each investor in the independent Patrimony, the payments will be made through the offices of the BIC that will act as Agent of Collection and transference of the Agent of Handling.

 

DURATION
the mercantile contract of fiduciary will last a minimum of 10 years, necessary time for the fulfillment of its purpose. The previous thing without damage of the causal ones of completion to that the clause fifty seventh of the Contract of Mercantile Fiduciary talks about.

The securing process will last ten years, after which it will come to the. Redemption of the titles, without damage of the prorogations that can have in agreement with the established thing in the Contract of Mercantile Fiduciary.

 

G. SECURING AND CASH FLOW PROJECTED: Fundamental aspect in the securing process is the analysis of the cash flow projected, because this one constitutes the decision-making factor.

One must begin analyzing the bases of projection differentiating the macroeconomic ones, the individuals of the company and the combined effect.

It is important to review the economic cycle of the country and the expectations to the future; if the economy is in growth and in which it leaves from the cycle or if on the contrary check  a stagnation, a crisis and to make the adjustments.

For example: If for the projections of year 8 and 9 we used results of years 4.5.6 and 7, we must make the adjustments that locate to us in normal conditions of projection, using a factor to calculate combining macroeconomic indicators.

 

H. ASPECTS TO REVIEW:

a. Macroeconomics Projections that are concordant with the numbers officially presented/displayed by the Bank of the Republic and the economic authorities (planning, development ministry, among others.)

b. If reforms observe that can affect the conditions as it could be a change in the tributary regime, tariff, of policy in relation to the rates of change, labor, etc.

c. Particular aspects of the company:

  • Changes of technology type that improve the productivity

  • Phenomena that affect the demand of the product like custom changes, product expenses, presence substitutes, etc

  • Relations with the different public that the company handles and with their labor force

  • Others.

d. Subjects of technical order, like the correct application of the used model of projection, verifying if it is adapted or and not proving the goodness of the applied adjustment retrospectively the calculation of results and the comparison of the real figures.

We remembered that base on the number projected except the considered deviation (to remember projections) the pessimistic projection of the income calculating, with which is recommended to work for financial effects. That pessimistic criterion of part of the base that if in the budgetary execution leftovers of income appear, the handling of excesses of cash represents a yield sacrifice well, is equivalent to the cost of the risk that would imply a deficit.

Didactic Exercise: Next the securing in Colombia acquires knowledge with an example taken from the book "A window towards the financial modernization", published by the supervision of values.

VPN = CF0 + CF1

(1 + i)
+ CF2

(1 + i)2
+ CF3

(1 + i)3
+ CFn

(1 + i)n

i represents the interest rate to which the cash flows discounted, for each assumption, respectively 24.30%, 24,75% and 22.96%. In the first considered assumption Valor Present Net (VPN) presents/displays a profits (in pesos of period zero) of $480 million, that is to say, from this point of view the originator is recommended to develop the securing process, since it would be obtaining a profits. If we tried to establish a yield, we observed that the Internal Rate of Modified Return (in consideration to that in the used financial model an investment of excessive is made generated by the securing in other alternatives of investment) is of 7.98%.

It is important to write down that it has been imputed the totality of costs and expenses of the transmission in charge of the originator agent as commented before, whose effect is demonstrated in the indicators of evaluation of commented projects. For each specific process and once defined the true costs that the originator of the real state assets assumes the benefit he will be greater to the indicated one in this aside.

This commentary is valid for all the used assumptions.

For second supposed the VPN it throws a profit of $444 million pesos, whereas the yield for the originator through the TIRM is of the 10.22%. The presented/displayed indicators previously allow us to affirm that the securing project is due to accept.

For the third assumption, a profit of only $16 million pesos of the period the zero when using like evaluator mechanism is observed an appreciable diminishing when obtaining itself VPN.

 

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