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Structured Finance

Caselets
Prantik Ray

Baridhi Malakar was PGDBM passout from XLRI in 2014 and he joined Avendus
Capital Pvt. Ltd. Mumbai through Campus Placement. He was taken as a trainee
in the Structured product division since he attended a course on Structured
Finance at XLRI.
After the initial training is over Baridhi was asked by his senior Mr. Despande to
prepare a draft CDO scheme for a client who is going to invest in home loans of
7 scheduled commercial banks. Mr. Despande wants Baridhi to generate
various options for the client so that the latter can make up his mind.
Details of Loans to be invested in :
Sl. No
Name of Bank Size Avg. tenure Avg. Interest
1. Bank X
195 m
12.7 years
11.25%
2. Bank Y
215 m
11.4 years
9.75 %
3. Bank Z
268 m
14.3 years
12.00 %
4. Bank A
356 m
16.5 years
12.50 %
5. Bank B
175 m
12.5 years
10.25 %
6. Bank C
210 m
9 years 9 %
7. Bank D
305 m
13 years 11 %
You have to assume that prepayment rate on the portfolio will be 0.5 %
starting from the 6th month and going up to 5 % in 40th month. The default
rate on the portfolio will be 0.1 % each month starting from 3rd month and
recovery of the defaulted amount occurs @ 60 % after 3 months from the
default.
1. Prepare a pass through structure assuming 3 tranches with senior,
mezzanine and junior with 40%, 30% and 30% of the issue size. Show time
tranching, risk tranching (assuming the proportionate risk sharing) and
prepayment tranching.
2. Also suggest the credit enhancement structure in a pay through structure if