April 2005

Hi

I wonder if anyone could help me with a problem I have in question 2 of April 2005. In part (iv) the solutions, under first point of list, read "they (current bondholders) are required to buy the securitisation (i.e. they are the same investors". Am I missing something here - why would the current bonholders have to be the investors who buy the new bonds issued from the securitisation? I thought the securistisation would be open to anyone in the market?

Then in (iii) the solution calculates the new return on equity expected as
2(11-9/4-6/4) - where does this formula come from? I suppose it has something to do with what the solutions said in (iv) above? I understand that if the equity return =14.5% (increased from 12%) that the gearing will have increased but I first have to understand the formula that calculates the 14.5%!

Please help - thanks

 

oops

Sorry

I see this question has already been answered in the FAQ.

Colin - How is one supposed to figure out that we sell the securistisation bonds to the current bondholders (although this is not quite the same as the FAQ which just talks about the consolidated accounts)? Nowhere in the question does it say this - its one thing asking hard questions, its a totally different thing to ask a question like this.

Another thing, in the FAQ - at the end it is written that "We are not asked to assess the effect on WACC, but ..." - surely the question "...impact on the capital structure of the company" requires the effect on D, E, D/E and on WACC?

Thanks

 

I don't think I understand what happens here with the securitisation transaction.

The formula in the examiners report "2[11 - 9/4 - 6/4]" looks like they have a capital structure after the securitisation of:

Equity = 1,000m
Debt = 500m (this is the old debt which costs 9%)
Debt = 500m (the securitised bonds)

I thought that in doing the securitisation they will remove certain properties from the balance sheet (by selling them to a SPV) and the SPV will issue bonds of 500m. The company will then use the 500m they receive from the SPV to buy new property assets.

I didn't think the securitisation will impact the capital structure of the company. It will only affect their assets. The only impact on the capital structure will be the possible downgrading of the company's bonds.

There is a comment in part (i) which says the Company becomes the holder of equity in the SPV. I don't know if this may be linked to my question. I also did not see why this was obvious.

Hope someone can help.

 

Hi Colin,

Kindly work with me here;-

I think the 2*(11-9/4-6/4) comes from the following logic;-

Equity = 1,000m
Debt = 500m (this is the old debt which costs 9%)
Debt = 500m (the securitised bonds)

Ra = debt/(debt+equity)*Rd+equity/(debt+equity)*Re

0.11 = 1000/2000*9*1/4+6*1/4+1000/2000*Re, then solving for Re.

Note the 1/4 above comes in to realise that it will be unfair to attribute 1/2 the gearing to old and new debt, without realising that the old debt is in total 1/4 of the total portfolio and hence the new debt.

Alternatively you can think of it this way;-

debt/(debt+equity) = (1/2) divided by two to make the old and new debts share.

Colin am I making any sense? However what I still don't believe is making the securitised bonds contribute to additional 500m debt, I wasn't expecting the gearing to change when assets are passed to the SPV.

Tries looking at the FAQ thread, couldn't see anything relating to this question?

 

woops, its actually 0.11 = 1000/2000*(9*1/4+6*1/4)+1000/2000*Re thanks...

...whatever the examiner was thinking!