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First multi originator securitisation in microfinance

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In a first transaction of its kind, IFMR Capital (presently known as Northern Arc Capital) concluded a multi-originator securitisation of micro-loans originated by four  microfinance institutions in India. The Rs. 308 million ($ 6.5 million) transaction is backed by around 42,000 micro-loans originated by Asirvad Microfinance Pvt Ltd, Sahayata Microfinance Pvt Ltd, Satin Creditcare Network Ltd, and Sonata Finance Pvt Ltd.

IFMR Capital was the structurer, arranger and an investor in the subordinated strip of the transaction. Using the multi-originator securitization structure, IFMR Capital has been able to help a number of MFIs access mainstream capital markets. Given the size of the institution and the limited availability of unencumbered portfolios, accessing capital markets on their own is an unviable option for most small and medium MFIs. By pooling together the loan portfolios of these high-quality MFIs, IFMR Capital has demonstrated that these MFIs can access funding at a much lower cost than their average cost of funds. This is the first multi-originator securitization of micro-loans in the world.

Photos (Above & Below): At the signing of multi originator transaction in Mumbai between the MFIs, investor and the trusteeship company.

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IFMR Capital Mosec I, the multi-originator Special Purpose Vehicle, has issued two tranches of securities: a 77 percent senior-rated tranche with an expected maturity of 6 months, and a 23 percent subordinated strip with an expected maturity of 11 months. CRISIL assigned the highest short term rating of   P1+ (so) to the senior tranche, which was subscribed to a Bank. The closing of this transaction has resulted in the emergence of a new pricing benchmark in the less than 6-month maturity asset class.

As per the waterfall mechanism in the structure, the senior tranche will be fully paid out before the subordinated strip begins to receive cash flows.  The IFMR Capital Mosec I securitization has an average credit enhancement of 13 percent in the form of cash collateral provided by the four MFIs.  The senior tranche has additional credit enhancement provided by the junior strip which has been subscribed to by IFMR Capital. The originators will continue to service the underlying loans. The structure has been designed to align the interests of the originator and structurer with the interests of investors.

This is a landmark transaction in the microfinance sector because it is for the first time that small MFIs have been able to access the capital markets. The purchase of the P1+ rated senior tranche by the treasury department of a bank demonstrates that microfinance can form a mainstream asset class that can be benchmarked to comparable assets like P1+ rated commercial paper, and not just be relegated to the priority sector portfolio of banks. Apart from opening the sector to a new class of investors, the use of securitisation would ensure round the year funding to MFIs at a lower cost of funds.  This would eventually result in a lower cost of borrowing to the end customer.

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