An example close to reality:
1. The National Bank of Egypt issued two loans to two people to buy two cars:
Loan 1 = EGP 100 for the purchase of a luxury car by a person with high financial solvency, and the loan term is 1 year with an interest rate of 10%. I mean, he will pay EGP 110 after a year.
Loan 2 = EGP 50 for the purchase of a medium car by a person with a limited income at an interest rate of 12%, meaning he will pay EGP 56 after a year.
Al-Ahly Bank is defined as the originator of the loan or the originator of the loan portfolio.
2. There is a securitization company whose sole function is to issue bonds to investors to finance the purchase of the loan portfolio from the National Bank of Egypt. Securitization companies are subject to the supervision of the Financial Supervisory Authority and are regulated by a full chapter in the Capital Market Law 95 of 1992.
How it Works
1. The company agrees with the National Bank of Egypt to purchase the loan portfolio consisting of two loans worth 150 pounds. The National Bank here is known as the “wallet assignor” or the referrer.
2. To finance the purchase, the securitization company offers 15 bonds to investors, the value of each bond = EGP 10. These bonds are known as “securitization bonds”.
3. Due to the different degree of risk between the first and second loan, the bonds will be divided into two tranches:
The first tranche = 10 bonds with a value of EGP 10 and a return of 9%, meaning that investors in this tranche are entitled to EGP 109 (principal + interest) after a year.
The second tranche = 5 bonds with a value of EGP 10 and a return of 11%. Investors in this tranche are entitled to EGP 55.5 (origin + interest) after one year.
Disclaimer: The interest on bonds is less than the interest on loans imposed by the NCB for a reason explained below.
4. After a year, EGP 150 is collected from the 2 borrowers + the interest which is 10 (10% of 100) + 6 (12% of 50) by the securitization company.
150 + 10 + 6 = 166
5. The securitization company will pay the bondholders:
150 + 9 + 5.5 = 164.5
6. Where does the difference between the 166 and the 164.5 go to? The 1.5 goes to the securitization company as a profit.
Securitization (Part 2)
