Abs pakistan feb05

THE STUDY ON SUCCESS AND PROSPECTS OF ASSET
BACKED SECURITIZATION IN CORPORATE SECTOR
OF PAKISTAN
A thesis
Presented to the
Faculty of Management Sciences
Bahria Institute of Management and Computer Sciences, Karachi
In Partial fulfillment
Of the Requirements for the
Degree Master in Business Administration
By
NAJMUS SAQIB
FEBRUARY 07, 2005

The Study on Success and Prospects of Asset Backed Securitization in Corporate Sector of Pakistan
TABLE OF CONTENTS
ABSTRACT……………………………………………………..…………………...01
CHAPTER NO.1 PROBLEM AND ITS BACKGROUND
1.1 Introduction…………………………………………………………………..03
1.1.1 Asset Backed Securitization Market in Pakistan……………………..04
1.2 Statement of the Problem…………………………………………………….05
1.3 Significance of the Study…………………………………………………….06
1.4 Scope of the Study……………………………………………………………06
1.5 Delimitations…………………..……………………………………………..07
1.6 Definitions……………………………………………………………………07
CHAPTER NO: 2 RESEARCH METHODOLOGY AND PROCEDURES
2.1 Research Design……………………………………………………………..11
2.1.1 Purpose of the Study…………………………………………………11
2.1.2 Types of the Investigation……………………………………………11
2.1.3 Study Settings………………………………………………………...11
2.1.4 Researcher’s Interference…………………………………………….11
2.1.5 Time Horizon………………………………………………………...11
2.2 Respondents of the Study…………………………………………………….11
2.3 Instruments……………………………………………………………….......12
2.4 Treatment of the Data………………………………………………………...12
2.5 Presentation Analysis………………………………………………………...12
CHAPTER NO 3: REVIEW OF LITERATURE & STUDIES
3.1 Features of Asset Backed Securitization…………………………………….14
3.1.1 Marketability…………………………..………………………………14
3.1.2 Merchantable Quality………………………………………………….15
3.1.3 Wide Distribution……………………………………………………...15
3.1.4 Homogeneity………………………………..…………………………15
3.1.5 Special Purpose Vehicle……………………………………………….16
Project Thesis 2

3.1.6 Assets that can be Securitized………………………………………….16
3.2 Mechanism of Asset Backed Securitization & its beneficiaries……………..17
3.2.1 Process of Asset Backed Securitization………………………………..17
3.2.2 Why Do Issuers Need Securitization…………………………………..18
3.2.3 Why Do Investors Invest In Asset-Backed Securities…………………19
3.2.4 Impact of Asset-Backed Securitization on Capital Market……………20
3.2.5 Motivations in Future Flow Securitization……………………….……20
3.2.6 Managing Risks In Future Flows………………………………………21
3.3 Asset Backed Securitization in Pakistan……………………………………...22
3.3.1 Setting Up……………………………………………………………...23
3.3.2 Registration Issues……………………………………………………..23
3.3.3 Operations………………………………...……………………………24
3.3.4 Prohibitions…………………………………………………………….25
3.3.5 Problems……………………………………………………………….26
3.3.6 Hurdles & Initiatives…………………………………………………..26
CHAPTER NO 4: PRESENTATION ANALYSIS
4.1 Market Overview……………………………………………………………….29
4.1.1 Paktel Limited………………………………………………………..30
4.1.2 World Call Payphones Limited………………………………………32
4.1.3 Pakistan Telecommunication Ltd…………………………………….33
4.1.4 Pakistan Industrial Leasing Corporation……………………………..36
4.1.5 Associated Constructors Limited…………………………………….38
4.1.6 Orient Petroleum Inc. – Pakistan Branch…………………………….40
4.1.7 Pakistan International Airlines……………………………………….42
4.2 Fitch Rating For Pakistani Environment for Securitization……………………42
4.3 Summary of Asset Backed Securitization in Pakistan…………………………44
CHAPTER NO 5: SUMMARY OF FINDINGS AND CONCLUSION
5.1 Summary of Findings………………………………………………………...47
5.2 Conclusion…………………………………………………………………....49
5.3 Recommendations……………………………………………………………50
REFERENCES AND BIBLIOGRAPHY………………………………………….51
Project Thesis 3

ABSTRACT
This study analyzes and explores the existing status of Asset Backed Securitization in
Pakistan, its development and application in various business sectors, its importance and
significance for the corporate sector in Pakistan. It also covers the information about the
existing operational scenario for the asset backed securitization in Pakistan including the
challenges faced by corporate sectors and the future scope of the asset backed
securitization in the potential sectors of Pakistan for the economical growth. In Pakistan,
the Asset Backed Securitization involves the future flows of receivables of the
companies. The development of a viable securitization market is extremely dependent
upon the legal and regulatory framework that is in place to provide adequate protection
for investors. The development of a thriving securitization environment in Pakistan is no
exception. There is a part series that will review securitization deals in Pakistan. In this
section the regulatory framework that permits securitization to take place will be
analyzed. The mechanism of asset backed securitization has been studied, the benefits of
securitization process to the investors, companies and all other associates and the impact
of the asset backed securities on the capital markets in Pakistan. Moreover it also
discusses the risk faced by the parties in the securitization process and how these risks
can be managed. After all detailed description of the Asset Backed Securitization in
Pakistan there has been made a significant study on the various business sectors of the
country where the asset backed securitization has been implemented, their facts and
figures regarding the transaction summary; profitability and the amount of securities
have been studied. In the end there is a market overview of the asset backed
securitization in Pakistan, its future prospects in the country and the potential sectors
where the asset backed securitization can be implemented to achieve effectiveness. In the
last there is a detail of the findings of the research which answers all the questions of the
research. In findings it is encouraging to mention that there is a strong potential for the
growth of asset backed securitization in Pakistan, and the deals have been successfully
been carried out. Moreover the businesses are growing in the country, the investors’
confidence has been regained and the foreign investors are attractive to invest in Pakistan
which can be analyzed from the rising trend in the capital market indicators as the stock
exchange index crossed the KSE 100 index 7000 points. The government has tried its
level best to achieve a sustainable economic growth in the country by developing
attractive policies to the businessmen and entrepreneur.
Project Thesis 4

CHAPTER ONE
BACKGROUND OF THE SUBJECT AND
STATEMENT OF THE PROBLEM
Project Thesis 5

CHAPTER NO.1 PROBLEM AND ITS BACKGROUND
1.1 INTRODUCTION
Asset securitization is one of the most significant innovations in the global capital
markets during the last fifteen years. It has substantially enhanced the efficiency of
assets and liabilities by individuals and corporations.
Standard & Poor’s, 2000
Asset-Backed Securitization is one of the most exciting areas of application of
securitization, particularly from emerging market countries. Securitization is the
conversion of receivables and cash flow generated from a collection (pool) of financial
assets such as (mortgage loans, auto loans, credit card receivables and other assets
including present or future receivables) into securities that are backed by these assets. In
other words, securitization is the “pooling of homogenous, financial, cash-flow
producing, illiquid assets and issuing claims on those assets in the form of marketable
securities.”
The idea of asset backed securitization is to create a capital market product. It results in
the creation of a "security", which is a marketable product. Asset Backed Securities
(ABS) is considered both a fixed income and a derivative instrument. Asset Backed
Securities (ABS) qualify as a fixed income instrument because they generate a coupon
income (not necessarily fixed) periodically, and qualify as a derivative, since they are a
derived instrument from a plain vanilla instrument (a straightforward financial
instrument such as a standard fixed-interest product with no sophisticated add-ons) being
the underlying pool of assets.
Asset Backed Securitization is the issuance of a debt instrument backed by a revenue
producing asset of the issuing company. Asset securitization involves producing bearer
asset-backed securities usually Term Finance Certificates in Pakistan, which can be
freely traded and which are secured by a portfolio of receivables. In order to ensure
marketability, the instrument must have general acceptability as a store of value; hence,
the security is generally either rated by credit rating agencies, or is guaranteed by an
independent guarantor. Further, to ensure liquidity, the instrument is generally prepared
in homogenous lots as if it is a case of securitization of future receivables, the assets with
the same maturity will be pooled and taken up for the asset backed securities.
Project Thesis 6

ASSET-BACKED SECURITIZATION MARKET IN PAKISTAN:
Asset-Backed Securitization (ABS) was previously governed by a bare law till 1999. The
only significant securitization transaction in Pakistan before the guidelines and rules of
Securities and Exchange Commission of Pakistan was in 1997, the securitization of net
settlement receivables by Pakistan Telecom. Pakistan Telecom in the country's overseas
telephony monopoly and net settlement receivables arise when there are inward calls into
Pakistan. Pakistan Telecom, like most of the emerging Asian countries, would normally
have such remittances as the inward calls by Pakistani residents abroad would exceed
those outward calls, leading to a net settlement receivable. 6 international carriers such as
AT&T who were expected to pay to Pakistan Telecom entered into notice-of-assignment
agreements agreeing to pay into the collection account in favor of the SPV.
Thereafter, the guidelines and rules have been designed by the Securities and Exchange
Commission of Pakistan in 1999 for the establishment of Special Purpose Vehicle (SPV)
to carry out the Asset-backed Securitization in Pakistan. Banks and Development
Financial Institutions (DFIs’) were attractive to participate in the Securitization by
having their own Special Purpose Vehicle (SPV). In this regard, State Bank of Pakistan
has received requests from a number of financial institutions desirous of performing
various roles in assets securitization transactions through special purpose vehicle. These
requests have been considered in consultation with concerned quarters and it has been
decided that banks/DFIs can participate in assets securitization through SPV. These
guidelines limit (cap) the total exposure of a bank/DFI towards securities issued by a
Special Purpose Vehicle (SPV) at 5% of its own paid up capital or 15% of the total value
of the Asset-Backed Securitization (ABS) issued by the Special Purpose Vehicle (SPV)
— which ever is less. Further, the aggregate exposure on account of Asset-Backed
Securitization is limited to 20% of the total paid up capital of the bank/DFI. This will
encourage banks/DFIs to
(a) Invest in and sell-down these Asset-Backed Securities, i.e. to churn their Asset
Backed Securities portfolio to stay within the 20% cap and to
(b) Actively trade in Asset Backed Securities to develop a secondary market, rather than
to simply purchase these Asset Backed Securities and hold them till maturity.
Project Thesis 7

Securitization has not taken off in Pakistan to any appreciable extent. Pakistani market
for securitization seems to be a curious shape: both these deals are future flows-based,
and are domestic future flows. However, three or more transactions have been executed
in various sectors i.e. Pakistan International Airlines has struck a deal with Citibank for
securitization of domestic aviation future flows, ORIX Investment Bank recently
concluded a securitization transaction from the oil & gas sector for Orient Petroleum Inc.
Trust Investment Bank Limited announced the completion of Rs100 million
securitization of lease receivables pertaining to lease portfolio of Pakistan Industrial
Leasing Corporation (which now stands merged into Trust Bank). The deal marks the
completion of first ever securitization transaction in Pakistan.
Most recently, the SECP has granted registration to Securetel-SPV Limited, a wholly
owned subsidiary of United Executors and Trustees Limited, to operate as a special
purpose vehicle under the Companies (Asset Backed Securitization) Rules, 1999.
Securetel envisages mobilization of funds for Paktel Limited -a local cellular telecom- by
issuing Term Finance Certificates with the total sum of Rs840 million.
1.2 STATEMENT OF PROBLEM
This research aim is to respond and analyze the following questions and interviews have
been conducted from the companies to take information accordingly.
1. The determination of success of Asset-Backed Securitization in the Corporate
Sector of Pakistan?
2. The features of Asset-Backed Securities to make its attractiveness?
3. Why the investors are interested to invest in Asset-Backed Securities?
4. The impact of the Asset-Backed Securitization on the Asset and Liability
Management Status of the companies?
5. The impact on the liquidity and profitability of the Corporations executed the
Asset Backed Securitization transactions?
6. How the Asset-backed Securities have minimized the risk for the corporations?
7. To understand the role of banks and credit rating agencies in the Asset-backed
Securitization.
8. Impact of Asset Backed Securities on the Capital Market?
9. What are the future prospects of Asset Backed Securitization in Pakistan?
10. What are the opportunities in the current scenario?
Project Thesis 8

1.3 SIGNIFICANCE OF STUDY
The information technology and synthetic solutions have been driving the businesses of
the global economies. To deal with the various risks associated with the businesses, the
entrepreneurs have to come up with innovative solutions and asset-backed securitization
is one of them. All the companies face the sovereign risk including the political risk,
credit risk and liquidity risk. To deal with these risks and to improve the liquidity and
profitability position of the companies, they have to follow certain innovative solutions.
Asset Backed Securitization is one of the techniques adopted by the companies by
keeping in view the securitization of future flow receivables. In this way, the company
will be able to maintain its liquidity and profitability position with out compromising on
the operating and financial position of the company. It allows the development of new
instruments in the capital market which ultimately creates more investment opportunities
in the capital market. Besides this the study analyzes the opportunities where this
concept of asset backed securitization can be successfully implemented. The analysis not
only guides the present companies who have already adopted the asset backed securities
but also helpful for the potential companies.
1.4 SCOPE OF THE STUDY
The scope of this research covers the study of present and future receivables in the
corporate sector of Pakistan, its treatment through asset-backed securitization. The
corporations treat with trade receivables (present and future) by adopting various
synthetic techniques i.e. asset-backed securitization for improving their liquidity and
profitability position to remain competitive in the business environment. The study
comprises the period from 1999-2004 and reveals the facts of various companies in
public and private sectors. The sample taken for the research includes the companies:
• Pakistan Telecommunication Limited.
• Paktel Limited.
• Pakistan Industrial Leasing Corporation.
• Pakistan International Airlines.
• Associated Constructors Limited.
• Orient Petroleum Incorporation.
Project Thesis 9

To get further assistance for the research United Bank Limited for Asset Backed
Securitization in Paktel and Japan Credit Rating agency were also visited to get the
details of transaction summary.
The major limitations for the research are:
Disclosure of information termed as confidential by the companies and the bank.
Time was another limitation. Since it was not possible to study the whole banking
sector in the time span provided for this study and sampling was used.
Budget was another limitation. As there was no sponsor for this study, so the
financial constraint was also an impediment.
1.5 DELIMITATION
The basic assumptions taken for the research are:
There is one independent variable i.e. the Asset Backed Securitization process
adopted by the companies and the dependent variables are the profitability of the
companies, liquidity position of the company, availability of credits at lower cost and
development of an instrument in the capital market.
There is no political influence on the economic activities and investment
opportunities in the country.
1.6 DEFINITIONS
1. Asset Backed Securities a process whereby any SPV raises funds by issue of
Term Finance Certificates (TFCs) or any other instruments with the approval of the
Commission (SECP), for such purpose and uses such funds by making payment to the
Originator and through such process acquires the title, property or right in the receivables
or other assets in the form of actionable claims"
2. The entity that securitizes its assets is called the originator: the name signifies
the fact that the entity was responsible for originating the claims that are to be ultimately
securitized.
3. There is no distinctive name for the investors who invest their money in the
Project Thesis 10

instrument: therefore, they might simply be called investors. It may include financial
institutions, insurance companies, banks, state financial corporations, state industrial
development corporations, trustees or any asset management companies making
investment on behalf of mutual fund or provident fund or gratuity fund or pension fund
or foreign institutional investors.
4. The claims that the originator securities could either be existing claims, or
existing assets (in form of claims), or expected claims over time. In other words, the
securitized assets could be either existing receivables, or receivables to arise in future.
The latter, for the sake of distinction, is sometimes called future flows securitization, in
which case the former is a case of asset-backed securitization.
5. Since it is important for the entire exercise to be a case of transfer of receivables
by the originator, not a borrowing on the security of the receivables, there is a legal
transfer of the receivables to a separate entity. In legal parlance, transfer of receivables
is called assignment of receivables. It is also necessary to ensure that the transfer of
receivables is respected by the legal system as a genuine transfer, and not as mere
eyewash where the reality is only a mode of borrowing. In other words, the transfer of
receivables has to be a true sale of the receivables, and not merely a financing against
the security of the receivables.
6. Since securitization involves a transfer of receivables from the originator, it
would be inconvenient, to the extent of being impossible, to transfer such receivables to
the investors directly, since the receivables are as diverse as the investors themselves are.
Besides, the base of investors could keep changing as the resulting security is essentially
a marketable security. Therefore, it is necessary to bring in an intermediary that would
hold the receivables on behalf of the end investors. This entity is created solely for the
purpose of the transaction: therefore, it is called a special purpose vehicle (SPV) or a
special purpose entity (SPE) or, if such entity is a company, special purpose company
(SPC). The function of the SPV in a securitization transaction could stretch from being a
pure conduit or intermediary vehicle, to a more active role in reinvesting or reshaping the
cash flows arising from the assets transferred to it.
Project Thesis 11

Therefore, the originator transfers the assets to the SPV, which holds the assets on behalf
of the investors, and issues to the investors its own securities. Therefore, the SPV is also
called the issuer. In the Act an independent ‘Securitization Company’ or ‘Asset
Reconstruction Company’ is envisaged.
7. There is no uniform name for the securities issued by the SPV as such securities
take different forms. These securities could either represent a direct claim of the
investors on all that the SPV collects from the receivables transferred to it: in this case,
the securities are called pass through certificates or beneficial interest certificates as
they imply certificates of proportional beneficial interest in the assets held by the SPV.
Alternatively, the SPV might be re-configuring the cash flows by reinvesting it, so as to
pay to the investors on fixed dates, not matching with the dates on which the transferred
receivables are collected by the SPV. In this case, the securities held by the investors are
called pay through certificates. The securities issued by the SPV could also be named
based on their risk or other features, such as senior notes or junior notes, floating rate
notes, etc.
8. Another word commonly used in securitization exercises is bankruptcy remote
transfer. What it means is that the transfer of the assets by the originator to the SPV is
such that even if the originator were to go bankrupt, or get into other financial
difficulties, the rights of the investors on the assets held by the SPV is not affected. In
other words, the investors would continue to have a paramount interest in the assets
irrespective of the difficulties, distress or bankruptcy of the originator.
Project Thesis 12

CHAPTER TWO
RESEARCH METHODOLOGY
AND PROCEDURE
Project Thesis 13

CHAPTER NO: 2 RESEARCH METHODOLOGY AND
PROCEDURES
2.1 RESEARCH DESIGN
It includes the set up of research methodology and setup of research design. The research
includes:
Purpose of the Study:
The purpose of the study was descriptive in nature in which variables were described in
detail for better understanding.
Type of the Investigation:
It was non-causal or co-relational research. In this study relationships were established
between independent and dependent variable.
Study Setting:
The study setting was non-contrived. It was a field study as it examined the attitudes and
perception of these strategies in their natural environment. Variables were neither
controlled nor manipulated.
Researcher’s Interference:
A co-relational study was conducted in the natural environment with the researcher
interfering minimally with the normal flow of events. The extent of research interference
was minimal.
Time Horizon:
The study was cross sectional in nature.
2.2 RESPONDENT OF THE STUDY
The respondents of the study include the Financial Planning Department of the
companies selected for the study i.e. Pakistan Telecommunication Limited, Paktel,
Pakistan International Airlines, Associated Constructors Limited and Orient Petroleum
Incorporation. The bank considered to get the information is United Bank Limited for the
development of case of Asset Backed Securitization and department visited was the
treasury department. One of respondents of the study was the unit head of Corporate &
Structured Finance of Japan Credit Rating Agency (JCR-VIS).
Project Thesis 14

2.3 INSTRUMENTS
The instruments include the primary and secondary sources of the data collection for the
research. Primary sources of the data collection are the formal and structural interviews
and the observations techniques. An open ended questionnaire has been designed to
investigate the related matters of the research which includes all the related questions
about the asset backed securitization process, its development, its implementation, and
its impact over the operational activities of the companies.
While the secondary sources includes the:
Audited annual reports and accounts.
Other statutory statements.
Economic publications.
Central Bank Publications.
Credit Rating Agencies Publications.
World Wide Web.
Books and other Publications.
It also includes the visit to the Institute of Bankers, Pakistan Library for the data
collection from various published notes.
2.4 TREATMENT OF DATA
The analysis will be done on the basis of the data gathered by visiting the companies and
information revealed by them. The treatment will be in the descriptive form by analyzing
the results of securitization adopted in the companies in terms of the account receivable
collection, improving status of liquidity, the profitability, and other operational activities
of the companies in the figures.
2.5 PRESENTATION ANALYSIS
Final presentation of the facts will be in the form of tables, figures and the statistical
charts. Various schedules will be used to show the profitability situation of the
companies, its collection of present and future receivables.
Project Thesis 15

CHAPTER THREE
REVIEW OF LITERATURE
AND STUDIES
Project Thesis 16

CHAPTER NO 3: REVIEW OF LITERATURE & STUDIES
The development of a viable securitization market is extremely dependent upon the legal
and regulatory framework that is in place to provide adequate protection for investors.
The development of a thriving securitization environment in Pakistan is no exception.
The companies, investors, banks and development financial institutions were attractive to
execute the securitization deals in Pakistan. It is therefore, various deals regarding the
present and future receivables of the companies have been executed through asset backed
securitization in various business sectors of the country i.e. leasing sector, telecom
sector, oil sector, aviation sector and construction areas. To have the better understanding
about the securitization it is necessary to discuss the features the asset backed
securitization, mechanism and process of asset backed securitization, its beneficiaries,
investors of asset backed securities and motivation for the originator of ABS:
3.1 FEATURES OF ASSET-BACKED SECURITIZATION:
A securitized instrument, as compared to a direct claim on the issuer, will generally have
the following features:
3.1.1 MARKETABILITY
The very purpose of securitization is to ensure marketability to financial claims. Hence,
the instrument is structured so as to be marketable. This is one of the most important
features of a securitized instrument, and the others that follow are mostly important
only to ensure this one. The concept of marketability involves two postulates:
(a) The legal and systemic possibility of marketing the instrument;
(b) The existence of a market for the instrument.
Securitization is a fallacy unless the securitized product is marketable. The very
purpose of securitization will be defeated if the instrument is loaded on to a few
professional investors without any possibility of having a liquid market therein.
Liquidity to a securitized instrument is afforded either by introducing it into an
organized market (such as securities exchanges) or by one or more agencies acting as
market makers in it, that is, agreeing to buy and sell the instrument at either pre-
determined or market-determined prices.
Project Thesis 17

3.1.2 MERCHANTABLE QUALITY
To be market-acceptable, a securitized product has to have a merchantable quality. The
concept of merchantable quality in case of physical goods is something which is
acceptable to merchants in normal trade. When applied to financial products, it would
mean the financial commitments embodied in the instruments are secured to the
investors' satisfaction. "To the investors' satisfaction" is a relative term, and therefore,
the originator of the securitized instrument secures the instrument based on the needs
of the investors. The general rule is: the broader the base of the investors, the less is the
investors' ability to absorb the risk, and hence, the more the need to securities.
For widely distributed securitized instruments, evaluation of the quality, and its
certification by an independent expert, viz., rating is common. The rating serves for
the benefit of the lay investor, who is otherwise not expected to be in a position to
appraise the degree of risk involved.
In securitization of receivables, the concept of quality undergoes drastic change
making rating is a universal requirement for securitizations. As securitization is a case
where a claim on the debtors of the originator is being bought by the investors. Hence,
the quality of the claim of the debtors assumes significance, which at times enables to
investors to rely purely on the credit-rating of debtors (or a portfolio of debtors) and so,
make the instrument totally independent of the originators' own rating.
3.1.3 WIDE DISTRIBUTION
The basic purpose of securitization is to distribute the product. The extent of
distribution which the originator would like to achieve is based on a comparative
analysis of the costs and the benefits achieved thereby. Wider distribution leads to a
cost-benefit in the sense that the issuer is able to market the product with lower return,
and hence, lower financial cost to him. But wide investor base involves costs of
distribution and servicing. In practice, securitization issues are still difficult for retail
investors to understand. Hence, most securitizations have been privately placed with
professional investors. However, it is likely that in to come, retail investors could be
attracted into securitized products.
3.1.4 HOMOGENEITY
To serve as a marketable instrument, the instrument should be packaged as into
homogenous lots. Homogeneity, like the above features, is a function of retail
Project Thesis 18

marketing. Most securitized instruments are broken into lots affordable to the marginal
investor, and hence, the minimum denomination becomes relative to the needs of the
smallest investor. The need to break the whole lot to be securitized into several
homogenous lots makes securitization an exercise of integration and differentiation:
integration of those several assets into one lump, and then the latter's differentiation
into uniform marketable lots. This often invites the next feature: an intermediary to
achieve this process.
3.1.5 SPECIAL PURPOSE VEHICLE
In case the securitization involves any asset or claim which needs to be integrated and
differentiated, that is, unless it is a direct and unsecured claim on the issuer, the issuer
will need an intermediary agency to act as a repository of the asset or claim which is
being securitized. Let us take the easiest example of a secured debenture, in essence, a
secured loan from several investors. Here, security charge over the issuer's several
assets needs to be integrated, and thereafter broken into marketable lots. For this
purpose, the issuer will bring in an intermediary agency whose basic function is to hold
the security charge on behalf of the investors, and then issue certificates to the
investors of beneficial interest in the charge held by the intermediary. So, whereas the
charge continues to be held by the intermediary, beneficial interest therein becomes a
marketable security.
The same process is involved in securitization of receivables, where the special
purpose intermediary holds the receivables with it, and issues beneficial interest
certificates to the investors.
3.1.6 ASSETS THAT CAN BE SECURITIZED
Basically, all assets which generate a cash flow can be securitized e.g. mortgage loans,
housing loans, automobile loans, credit card receivables, trade receivables, consumer
loans, lease finance, etc. a perfectly and normal financial asset is usually securitized. A
difference is usually made between asset securitization and mortgage securitization.
Asset securitization is protected from a pool of loans and receivables while the
mortgage backed securities are protected by residential or commercial mortgage loans
however mortgage backed securities is a particular type of asset backed securities.
Project Thesis 19

3.2 MECHANISM OF ASSET-BACKED SECURITIZATION AND
ITS BENIFICIARIES:
The process of Asset Backed Securitization is summarized in the following diagram and
is described in detail:
Trustees
Assets Issue
Asset-Backed Securities
Corporate
Receivables
Special Purpose
Vehicle
Credit
Enhancer
Service
Manager
Investors
3.2.1 PROCESS OF ASSET BACKED SECURITIZATION
The process of creating asset backed securities is discussed in the following points:
1. The Company sells its products and services on credit and this becomes the trade
receivables or account receivables in the balance sheet of the company.
2. Out of these receivables, the originator pools certain receivables together on the basis
of maturity and risk structures and sells these to a securitization company known as
Special Purpose Vehicle (SPV) or Special Purpose Entity (SPE).
3. The securitization company makes payment (consideration) to the originator for the
receivables purchased.
4. These receivables are converted into a pool of securities by the securitization
company for the purpose of issuing Pass Through or Pay through Certificates (PTCs).
5. These Pay Through or Pass Through Certificates are then rated by Credit Rating
Agencies e.g. Pakistan Credit Rating Agencies (PACRA), JCR-VIS Credit Rating
Co. Ltd.
Project Thesis 20

6. The Pay Through or Pass Through Certificates are sold to individual investors or
Qualified Institutional Buyers.
7. The Collection of receivables from debtors is obtained by Company itself in case of
Pass Through Certificates and by Securitization Company in case of Pay Through
Certificates. If collection is made by the Company then it is under obligation to pass
on the money to the securitization company.
8. The securitization company then, makes payment to the investors.
3.2.2 WHY DO ISSUERS NEED SECURITIZATION?
The need for cash is to grow and expand the business. Raising equity and borrowing
through debt is difficult, expensive and can distort the financial leverage of a company.
Equity and bonds are two sources of “on-balance sheet” financing. Securitization, on the
other hand, is an “off-balance-sheet” source of funds. According to the FASB, rules
governing securitization (assuming all conditions are met) cash and proceeds from the
sale of assets are added to assets, while the transferred asset itself is taken off the balance
sheet. ABS offer increased liquidity through a broader market. Besides this the originator
of asset-backed securitization may benefit in the following manners:
• Securitization mainly results in receivables being replaced by cash thereby improving
the liquidity position.
• It removes the assets from the balance sheet of the originator, thus liberating capital
for other uses, and enabling restructuring of the balance sheet by reducing large
exposures.
• It facilitates better asset liability management by reducing market risks resulting from
interest rate mismatches. The process also enables the issuer to recycle assets more
frequently and thereby improve earning.
• Finally, transparency may be improved since securitization results in identifiable
assets in the balance sheet.
Reasons to Securitize Receivables:
Probably the most common reason to securitize receivables is to efficiently raise cash.
Enhancing working capital is especially important for companies with long sales cycles
and terms of sale. Given that receivables are typically the largest single asset category on
the balance sheet, it is a natural choice for monetization. The securitization process
Project Thesis 21

generally provides companies broader access to capital at a lower all-in-cost of funds.
This is especially true for companies whose creditworthiness is weaker than their
customers. In such instances there exists a credit arbitrage. A well-structured
securitization can achieve an investment grade rating even for a selling company that is
not investment grade rated. Through standardized underwriting, robust servicing, credit
insurance and appropriate structuring, a company can intends to further broaden the
opportunities for mid-sized companies to bootstrap their access and resulting
efficiencies. Achieving balance sheet management objectives can be an additional reason
a company chooses to securitize their receivables. Sale treatment can be achieved with
the resulting opportunity to de-leverage through the use of proceeds to redeem
outstanding debt. Compliance with debt or loan covenants can be fostered through
improvements in certain balance sheet ratios and metrics, including: days sales
outstanding (DSO), “quick” ratio, return-on-assets (ROA) and debt-to-equity ratio.
3.2.3 WHY DO INVESTORS INVEST IN ASSET-BACKED SECURITIES?
These the reasons the investors prefer to invest in asset-backed securities:
• Securitization creates instruments with differing maturities, risks, coupons, which
is appealing to investors. Securitization is a structured financial instrument i.e.
tailored to the risk-return and maturity needs of investors, rather than a simple
claim against an entity or asset.
• Asset-Backed Securitization offers a yield higher than instruments with
comparable risk. This is due to the credit worthiness of the instruments (usually
AAA rated) and the credit enhancement features.
• Asset-Backed Securitization offers a predictable cash-flow. Investors buy Asset-
Backed Securities with confidence that payments will occur at specified dates in
the future.
• Asset-Backed Securities are secured by the underlying assets; therefore they offer
significant protection against downgrades by rating agencies to the issuer.
• It provides an opportunity to the investors to diversify their investment portfolio
by investing in these asset backed securities.
Project Thesis 22

3.2.4 IMPACT OF ASSET-BACKED SECURITIZATION ON CAPITAL
MARKET:
The impact of asset-backed securities on capital market can be analyzed in the following
points:
• Securitization reduces transaction costs in the capital market by creating a market
for financial claims, which otherwise, would have remained illiquid, i.e. limited
trading.
• Securitization saves intermediation costs, since the specialized intermediary costs
are service related and generally lower. Securitization promotes saving since it
offers a security to investors with guaranteed interest or payments and an
assurance of credit quality and safety nets in the form of trustees.
• Securitization leads to diversification of risk since it pools several financial assets
with differing features together and offer them to investors. When the ownership
of the asset becomes spread among a wide base of investors, it becomes diffused,
thus reducing the inherent risk in financial transactions.
• Securitization promotes the idea of capitalists being trustees of resources and not
owning them. Just as financial assets can be securitized, physical assets can also
be securitized, which means that an entity can make use of physical resources
without actually owning them.
3.2.5 MOTIVATIONS IN FUTURE FLOW SECURITISATION
An originator in a future flow securitization would look essentially at two motivations:
Does it allow the originator to borrow more than under traditional funding
methods;
Does it allow the originator to borrow at lesser cost than under traditional funding
methods?
There is no certain answer to either of these two questions, but the economics of any
future flow deal should be tested on the above. It is possible that a future flow
securitization may allow the originator to borrow more, since, while a typical traditional
lender looks at the assets on the balance sheet (say, receivables which have fallen due), a
Project Thesis 23

future flow investor looks at receivables which are not on the balance sheet. A future
flow transaction may even allow the originator to borrow at lesser costs.
3.2.6 MANAGING RISKS IN FUTURE FLOWS SECURITIZATION:
Developing an appropriate legal structure and managing credit risk are the two biggest
challenges in ensuring the success of an asset-backed issue. Many investors who
recognize that asset-backed securities can be a rewarding component of their portfolios
are unwilling or unable to perform the complex analysis required. They may also be
unable or unwilling to bear the credit and other risks associated with these instruments.
Fortunately, in the United States and certain other countries, the ABS market is
sufficiently well developed that the risks can be carefully identified and reallocated to
those best able to bear them. Today, the techniques for doing so are being transferred to
Asia.
Since investors rely heavily on the detailed assessments and ratings assigned by the
principal rating agencies such as Moody’s and Standard and Poor’s, early involvement of
these agencies in the risk-management process makes good sense. The rating agencies
focus on such issues as the following. Involvement of the rating agencies in the ABS
risk-management process is essential, since investors rely heavily on their assessments.
§ Credit risk
§ Liquidity risk
§ Financial guarantees
Credit risk:
It arises from the possibility that the issuer of an ABS, usually a special purpose vehicle,
may default on its liabilities. Since the SPV is normally structured to have no assets or
business other than holding the securitized assets, the principal focus is on the cash flow
from the assets themselves. The most important possibility to be considered is default by
the underlying borrowers, such as the car owners in the case of automobile loan
securitization. While a small but predictable loan loss ratio is manageable, the rating
agencies must carefully analyze the variations in default and delinquency rates and
evaluates any factors that might trigger an escalation in defaults.
Since the SPV is normally structured to have no assets or business other than holding the
securitized assets, the principal focus is on the cash flow from the assets themselves.
Project Thesis 24

Liquidity risk:
It is the possibility of a cash shortfall at times when interest or principal payments are
due. If the individual obligors behind the underlying loans are late with their payments,
cash flow to the SPV may be insufficient for it to make interest and principal payments
in full and on time to investors. The cash flow from the underlying assets to the investors
should be structured -- and, if necessary, supplemented -- in such a way that no such
shortfall will occur.
Financial Guarantee:
Many asset- backed securities are guaranteed, to remove the burden of analysis from the
investor. Rather than having to conduct a detailed analysis of a complex structure, many
investors prefer to rely on a top-rated, specialized financial institution whose only
business -- and livelihood -- depends upon maintaining its top rating through extremely
prudent credit policies.
3.3 ASSET-BACKED SECURITIZATION IN PAKISTAN:
Following the October 1999, there was a reform driven agenda causing an unprecedented
amount of regulatory and enabling legislation in Pakistan. Law making in Pakistan has
now become a more consultative and transparent process with cluster participation and
input being a key feature. However, state policy has often defeated by persistent
bottlenecks in the administrative machinery and wherever official and lower level
corruption are endemic.
In some ways ABS is not a whole new feature in Pakistan. Indeed, corporate debt issues
by leasing companies that were secured by way of assignment of specific lease rentals
had resemblance to ABS. However, these did not qualify as true ABS since the
assignment of lease receivables did not constitute a ‘true sale’ by way of an SPV.
Assigned receivables also, were not removed from the balance sheet of the issuer.
In what can best be called a piecemeal effort, THE COMPANIES (ASSET BACKED
SECURITIZATION) RULES, 1999 open up the securitization market in Pakistan
through Statutory Regulatory Order 1338(I)/99. Only eleven sections long, the Rules fail
to cover much ground in terms of detail but open up tremendous scope of ABS activity
in their interpretation. The skeletal law leaves therefore, tremendous room for expansion
and development of ABS in Pakistan where securitization provides a means of
Project Thesis 25

liquidating certain assets (normally long-term receivables) on the balance sheet of a
financial institution by issuing marketable securities against these assets. It, therefore,
represents a process whereby the balance sheet can be unlocked by freeing up capital
tied-up in long-term assets that are essentially illiquid in nature.
3.3.1 SETTING UP
Aside from government owned entities, the Rules allow any Public Limited Company
(SPC) or a Trust (SPT) to register with the Securities & Exchange Commission of
Pakistan (SECP) for the purposes of becoming an SPV.
The SPC must adhere to the comprehensive provisions of the Companies Ordinance
1984 which created by formerly Corporate Law Authority (CLA). The CLA has since
been replaced by the SECP (created under the Securities and Exchange Commission of
Pakistan Ordinance, 1997); which now continues to be a strong regulator of Equity and
Investment in Pakistan. The Ordinance governing Special Purpose Committees (SPC)
also covers matters of Winding up & Insolvency, Schemes for Amalgamation and
Disclosure. In addition to this, an SPC must have a paid up capital of at least one
hundred thousand rupees (approx. US$1666).
The Trusts Act in Pakistan dates back to 1882 and has thus developed rich case law
offering an appropriate vehicle for entities including non-profit organizations, charities
and grant foundations. The Ordinance also applies in some cases to SPTs as prescribed in
the Rules.
3.3.2 REGISTRATION ISSUES
An aspiring SPV with directors, officers or employees that have been adjudged as
insolvent, have suspended payment, compounded with creditors, have been convicted of
fraud or breach of trust or of an offence involving moral turpitude is precluded from
Registration with the SECP. The Rules do not address jurisdictional issues where the
above-mentioned offences are committed in foreign law jurisdictions, by foreign entities.
Arguably, it appears that such entities may not be barred from registration by the SECP.
The Rules give the SECP powers to bar an entity where the promoters, directors and
trustees of such person are, in the opinion of the SECP, not persons of means and
integrity and do not have special knowledge and experience of matters to be dealt with
Project Thesis 26

by a SPV. Such discretion may be founded in bad policy where necessary opinions of the
regulator may lie well against an entity for personal reasons and indeed the global
lessons of Enron might be hard learnt by such entities.
Upon application for registration by the Trust or Company, a fact finding inquiry ensues
which leads to the SECP granting a certificate of registration. In addition to the eligibility
criteria prescribed in the Rules, information relating to the Originator, Obligator, Trustee
and other related parties in the transaction along with the details of the securitization
transaction are also required upon application. The Rules place certain obligations of
periodic reporting upon the SPV and give the SECP powers to cancel the registration
if the SPV fails to make a public offering of securities within such time frame and in
such manner as may be specified by it while granting the certificate of registration. If the
SECP is satisfied that it would be in the public interest so to do, it may on its own
motion, or on the application of the investors holding not less than ten percent of the
securities issued by such SPV, by order in writing, cancel the registration. However,
the SPV has been given the right of hearing before any such order is passed within the
Rules. To rule out possible conflicts of interest, the ABS Rules also require that the
Originator and the SPV not be "connected persons" defined as any person or company
beneficially owning, directly or indirectly, ten per cent or more of the share capital of
that SPV or able to exercise directly, or indirectly, ten per cent or more of the voting
rights in that company.
3.3.3 OPERATIONS
A Trust is by far the most appropriate choice of SPV to issue Asset Backed Certificates
by process of Asset Backed Securitization which has been defined in the Rules as:
"A process whereby any SPV raises funds by issue of Term Finance Certificates
(TFCs) or any other instruments with the approval of the Commission (SECP), for
such purpose and uses such funds by making payment to the Originator and
through such process acquires the title, property or right in the receivables or other
assets in the form of actionable claims"
The Pakistan Code of Corporate Governance, notified by the SECP in the wake of
Enron’s collapse, has no applicability to SPTs although it is a mandatory requirement to
implement for all public listed companies since early this year. Any securitization
Project Thesis 27

activity in Pakistan must also be in conformity with the Islamic principles of finance and
investments which prohibit interest based lending, but encourage management of risk in
expectation of profit or mark-up.
The Rules define "future receivables" to include all such receivables against which
income may accrue or arise at a future date. An inclusionary structure therefore leaves
the playing field for ABS wide open. External credit enhancement can be obtained for
the securitization structure by means of
Pool & bond insurances (to cover any losses on the pool of assets),
Letters of credit from banks (to cover losses up to a certain amount) and
Corporate guarantees (either from a third party or from the Originator).
Advertisements, prospectuses and other invitations to the public to invest in a scheme,
including public announcements, must be submitted to the SECP for approval prior to
their issue. The approval may be varied or withdrawn but not before a hearing. SPVs
may at all times take legal recourse against the orders of the SECP.
3.3.4 PROHIBITIONS
An SPV in Pakistan is generally prohibited from:
merging with, acquiring or taking over any other company or business, unless it
has obtained the prior approval of the Commission in writing to the scheme of
such merger, acquisition or take-over;
pledging any of the assets held or beneficially owned by it except for the benefit
of the investors;
making a loan or advancing money to any person except in connection with its
normal business;
participating in a joint account with others in any transaction;
applying any part of its assets to real estate except property for its own use;
making any investment with the purpose of having the effect of vesting the
management, or control, in the Special Purpose Vehicle; and
Project Thesis 28

giving guarantees, indemnities or securities for any liability of a third party;
3.3.5 PROBLEMS
The rather hastily drafted Rules leave much to be desired in terms of emphasizing a true
sale for adequate bankruptcy remoteness and leave definitional issues mostly nebulous
and left to the better practice of industry. The Rules do not explicitly state that the assets
must be owned by a Special Purpose Vehicle (SPV), whose ownership of the sold assets
is likely to survive the bankruptcy of the Seller. Thus the conceptual understanding of a
true sale is alien to many an investor in Pakistan.
Trusts are by far the most convenient vehicle for securitization in Pakistan, although the
Rules prescribe no minimum standards for them. Being a single purpose entity, the Rules
do not provide for any voluntary deregistration mechanism or a renewable operational
timeframe for the SPV. Neither do the Rules specify any servicing or liquidity support
obligations inter se the Originator and the SPV although secure originators assigning
lease receivables in Pakistan operate with certain negotiable minimum standards for
servicing, credit enhancement and non-interest based lending. The ABS Rules are also
silent on the issue of private placement though the SECP has allowed certain strong
financial companies to make private placements for lease receivables and thereby issue
TFCs.
3.3.6 HURDLES & INITIATIVES
Securitization is at a nascent stage in Pakistan. Indeed, Income Tax and Islamic
Jurisprudence have been the most persistent retardants for growth and development of
the debt market. A lack of legal and regulatory framework coupled with tax obstacles in
the transfer of financial assets and issuance of TFCs have further impeded ABS. Given
that Pakistan’s inherent sovereign risk considerations have hindered cross – border
transactions in the past, the newly ushered government and US interests in the region
promise some stability of governance, law and order.
The income of an SPV is now exempted from tax through the Finance Ordinance 2000
and they also receive preferential withholding treatment. Although stamp duties are still
applicable to the transfer of assets, the stamp duties in respect of issuance of TFCs have
been greatly reduced. As a matter of policy the SECP is dedicated to the facilitation of
venture capital, corporate debt and securitization. The Board of Investment’s Policy now
Project Thesis 29

allows foreign investment on a repatriable basis is in the Service, Infrastructure, Social
and Agriculture Sectors subject to certain conditions. The dependable presence of Fitch
Ratings and the International Finance Corporation (IFC) as a Credit Rating agency has
added to investor confidence in the Capital and Debt markets of Pakistan. Most
promising for the ABS market are guidelines for the relaxation of Prudential Regulations
for Banks and DFI in respect of investment in securities issued by SPVs are currently
being drafted by the State Bank of Pakistan (SBP).
Project Thesis 30

CHAPTER FOUR
PRESENTATION ANALYSIS
Project Thesis 31

4.4 MARKET OVERVIEW:
Securitization was not taken off in Pakistan to any appreciable extent till 1997. The only
significant securitization transaction in Pakistan in 1997 was the securitization of net
settlements receivables by Pakistan Telecom. Pakistan Telecom in the country's overseas
telephony monopoly and net settlement receivables arise when there are inward calls into
Pakistan. Pakistan Telecom, like most of the emerging Asian countries, would normally
have such remittances as the inward calls by Pakistani residents abroad would exceed
that outward calls, leading to a net settlement receivable. 6 international carriers such as
AT&T who were expected to pay to Pakistan Telecom entered into notice-of-assignment
agreements agreeing to pay into the collection account in favor of the SPV. Thereafter,
there was a considerable growth noted in the securitization market and especially after
the approval of rules and regulations by Securities and Exchange Commission of
Pakistan in 1999. The transactions include the:
• Securitization of receivables of Paktel,
• Securitization for non performing leases/Loans of the leasing company named
Pakistan Industrial Leasing Corporation Limited,
• Securitization of future receivables of Orient Petroleum Incorporation, Pakistan
Branch,
• Securitization of future flow receivables arising from a construction project of
Associated Constructors Limited in the construction process of six towers of
Creek Vistas Towers in Creek City Project. This securitization was the latest
from all the securitization deals in Pakistan.
The case studies have been developed for the study of securitization deals, its
mechanism, its originators, its special purpose vehicles i.e. securitization trusts. The case
studies of different sectors and companies have been designed for the better
understandings are discussed below namely:
• Paktel Company Limited.
• World Call Payphones Limited.
• Pakistan Telecommunication Limited.
Project Thesis 32

• Pakistan Industrial Leasing Corporation.
• Associate Constructors Limited.
• Orient Petroleum Limited.
• Pakistan International Airlines.
4.1.1 TELECOM SECTOR (PAKTEL LIMITED)
Special Purpose Vehicle: Securetel-SPV Limited.
Originator: Paktel Limited.
Recently, the SECP has granted registration to Securetel-SPV Limited, a wholly owned
subsidiary of United Executors and Trustees Limited, to operate as a Special Purpose
Vehicle under the Companies (Asset Backed Securitization) Rules, 1999. Securetel
envisages mobilization of funds for Paktel Limited -a local cellular telecom- by issuing
TFCs. Of the total sum of Rs840 million, TFCs worth Rs640 million would be offered as
pre-IPO and Rs200 million in IPO. The TFC is rated "A" (single A) by PACRA, is for 3
year tenor and carries profit at SBP discount rates plus 200 bps with a cap of 16 per cent
and floor of 12 per cent for the first year and 11.5 per cent for the last two years. United
Bank Limited has acted as consultant for the ABS transaction. This securitization would
enable Paktel to replace its short-term foreign currency debt with medium-term local
currency debt. Considering the fall of the greenback following 9/11, the transaction
would improve Paktel's liquidity position by reducing foreign exchange losses.
Securetel purchased a portion of Paktel’s receivables and issued ABS notes in March
2003. Paktel in turn expects to utilize the proceeds in retiring partly its existing loans of
United Bank Limited of Rs750 million and Pak Kuwait Investment Company's Rs240
million. Nearly 99 per cent shares in Paktel are held by the Luxembourg based Millicom
International Cellular S.A, which is a fairly large holding company with 18 cellular
operations in 17 countries. Another major player, Orascom Telecom is also expected to
assign its nationwide receivables to a foreign bank in Pakistan.
Analysts at IP Securities (Pakistan) said that with the falling rate of returns on National
Savings Schemes (NSS) and Government Securities for the general public and financial
institutions, investment avenues were falling short and the facilitation of innovative
instruments was needed. Paktel had suffered huge exchange losses till the financial year
Project Thesis 33

2001, due to foreign currency borrowings, a significant portion of which had been paid
off through internal cash generation and short-term loans. This had led to high reliance
on short-term borrowings. Paktel had therefore decided to issue medium term securitized
TFCs to rationalize its capital structure and to correct imbalance in asset liability
maturity profile.
The analyst noted that Paktel had suffered huge exchange losses till the financial year
2001, due to foreign currency borrowings, a significant portion of which had been paid
off through internal cash generation and short-term loans. This had led to high reliance
on short-term borrowings. Paktel had therefore decided to issue medium term securitized
TFCs to rationalize its capital structure and to correct imbalance in asset liability
maturity profile.
The 'mitigants' part of the Prospectus listed among others the following: The purpose of
securitization was to segregate the operational performance of a company from its
financial performance. The risk was on the operational performance of Paktel rather than
on its financial performance; the investment by the TFC holders would be in securities
issued by SPV and not in Paktel. Thus the TFC holders would not largely be dependent
on the financial performance of Paktel; the transaction was a future flow transaction,
because it was not backed by cash flows generated by an existing pool of assets, but
rather by cash flows from assets that would be generated in the future.
The prospectus noted that the future flow transactions were dependent on the ability of
the company to produce a good or provide a service, and thus derived their strengths
from segregating its performance from the overall financial profile of the company. By
separating operational from financial performance such transactions offered a less risky
investment alternative.
According to other details noted in the prospectus, of the total sum of Rs840 million,
TFCs worth Rs640 million would be offered as pre-IPO and Rs200 million in IPO. The
TFC is rated "A" (single A) by PACRA, is for 3 year tenor and carries profit at SBP
discount rate plus 200 bps with a cap of 16 per cent and floor of 12 per cent for the first
year and 11.5 per cent for the last two years.
Project Thesis 34

4.1.2 WORLDCALL PAYPHONES LIMITED:
The telecom sector itself has seen substantial activity in structured finance. WorldCALL
Payphones Limited is one of Pakistan's fastest growing telecom companies, with an
installed base of over 5,000 smart card payphones throughout Pakistan. WorldCALL
needed to raise Rs. 345 million in new equity financing to fund a major expansion plan,
including 8,000 additional card phones and a proposed wireless local loop network
supporting 50,000 additional phones. Following the unsuccessful attempts of another
securities firm to effect the offering and reopen the Pakistani IPO market, after a dry
spell of over two years, WorldCALL appointed AKD Securities as its financial advisor
to raise the necessary funds.
Realizing the potential upside for well funded private companies in Pakistan's
increasingly deregulated telecom sector, AKD underwrote the offering. After leading a
Rs. 195 million pre-IPO placement with institutional investors, AKD generated demand
for the IPO and as a result WorldCALL's Rs. 150 million IPO was heavily
oversubscribed and the company received the funds necessary for it to continue on its
growth trajectory.
Head of Research at IP Securities, Iffat Zehra Mankani commented that it was
encouraging to note the pace of growth at which financial instruments that were new in
this part of the world were being introduced. Analyst said that with the falling rate of
returns on National Savings Schemes for general public and Government Securities for
the financial institutions, investment avenues were falling short and the introduction of
innovative instruments was needed.
Project Thesis 35

4.1.3 PAKISTAN TELECOMMUNICATIONS LTD.
Net Settlement Securitization
In 1997, Fitch rated a securitization of Pakistan Telecommunications Ltd.’s (PTCL) net
settlement receipts. The receivables in this type of transaction are the net amounts
generated by tariffs that one company owes to another for the use of its
telecommunication infrastructure when completing international calls. These tariffs arise
when individuals in a developed country (e.g., the United States, Japan or Germany)
make calls into an emerging-market country (e.g., Chile, Pakistan or Peru). Although the
developed-market company, MCI, for example, is originating the call and collecting the
revenues from the individual in the developed country, MCI must use PTCL’s
infrastructure to complete the call. PTCL allows MCI to use its infrastructure but charges
the company a fee for each minute of use. Similar fees are charged to PTCL when calls
originate in Pakistan and go to MCI’s market. There is a net amount in favor of PTCL,
because the volume of originating calls tends to be much higher in the United States than
Pakistan. It was these international net payments that were securitized in the PTCL
transaction. A key factor to this transaction was that the international carriers, such as
MCI, signed notice and acknowledgement agreements (N&As) that legally obligated
them to remit payments into the offshore collection account that is used to pay investors.
This structure mitigates certain sovereign risks, such as transfer and convertibility and
sovereign redirection. Due to this structure, Fitch initially rated the transaction ‘BBB–’.
This rating meant the transaction had a lower probability of default compared to that of
the sovereign. Additionally, Fitch rated the transaction above PTCL’s local currency
rating due to the company’s monopoly status in the local market and the high ratio of net
settlements in favor of Pakistan. Furthermore, the company is fully supported by the
government since it is 88% state owned. Rating the transaction above the local currency
rating of PTCL and the sovereign signifies that Fitch believes the net settlement cash
flows would continue to pay offshore investors, even during a default on local creditors.
From 1998–2001, Pakistan’s and PTCL’s credit quality deteriorated. Due to the decline
in credit quality and an increased risk of cash flow disruption, Fitch downgraded the
transaction first in June 1998 to ‘BB+’ and then again in October 1999 to ‘BB’.
Additional concerns included the drastic declines in net settlement tariffs.
Project Thesis 36

Continued Performance
The PTCL transaction will mature in August 2003 and currently has an outstanding
balance of US$2.9 million out of the original issuance of US$250 million. The deal has
been performing well since 2001: the average receivables for the past year and a half
have been US$45.9 million, and the coverages have been well-above the required levels.
The purchased receivables debt service coverage ratio (DSCR) has averaged 3.0x (twice
the 1.5x requirement), and the sum of the two lowest purchased receivables DSCRs
during four consecutive periods has averaged just less than 3.0x (more than the required
2.0x coverage). These levels are shown in the PTCL 12-Month Rolling DSCRs and
Project Thesis 37

PTCL Performance charts. While Fitch still does not publicly rate Pakistan, the ‘BB’
rating on the transaction is still notches higher than what we believe the sovereign rating
to be. This rating differential reflects Fitch’s opinion that the risk of the net receivables
not going to investors (per the going concern assessment) remains relatively low
compared to our view regarding the sovereign’s creditworthiness in the current
environment. The ‘BB’ rating is supported by various aspects of the transaction. PTCL
holds a 100% market share within Pakistan; the ratio of net settlements will continue to
favor Pakistan; the decline in settlement rates has been offset by an increase in volume;
and the N&As.
Securitization of international receivables
Currency balance Rupee equivalent Quarterly
Currency 2003 2002 2003 2002 Installments
(Amount in thousand) (Rupees in thousand) Payable
US $ 15,126 72,576 876,106 4,383,584 1
The company obtained funds aggregating US $ 250 million against securitization of its
future international receivables relating to certain carriers. Under the arrangements, these
carriers have irrevocably assigned the company's future receivables to a Trust set up for
this purpose for the tenor of the facility. The cash flows arising from these receivables
are paid to the company by the Trust after deducting there from the repayment of
principal and return that investors in the Securitization Trust are to receive and retaining
a cash margin as a default cushion. Interest is payable quarterly at 8.42% per annum.
Project Thesis 38

4.1.4 THE LEASING SECTOR:
(PAKISTAN INDUSTRIAL LEASING CORPORATION)
Earlier in June 2002, the specialized Companies Division of the SECP processed the
registration of First Securitization Trust as the first special purpose vehicle under the
Companies (Asset Backed Securitization) Rules, 1999. This trust has been set up to raise
funds for Pakistan Industrial Leasing Corporation Limited (PILCORP) up to rupees one
hundred million through issuance of debt instruments against the Securitization of
PILCORP's lease receivables. The said transaction was arranged by Aqeel Karim Dhedi
Securities (Pvt) Limited (AKD) and Orix Investment Bank Limited to provide funds to
PILCORP for retiring its debt obligations. In emerging markets like Pakistan, where
volatile economic cycles and sudden shocks are translated on the asset portfolio,
protection against deteriorating credit quality is very important. This unstable nature of
Pakistan’s economy has highlighted the importance of a strong capital base which can
provide protection against unanticipated losses. Furthermore, substantial capital provides
a leasing concern with greater flexibility to leverage its balance sheet. On the other hand,
for leasing companies in developed markets, deterioration in the asset quality usually
occurs over the long run, thus enabling them to increase general reserves/provisioning
against potential losses over a period of time. A serious issue plaguing the leasing sector
is the high rate of non-performing leases and loans (NPLs), a situation that can be
attributed primarily to the inadequacy of risk assessment procedures and, to a lesser
degree, limited industrial growth that has led to sectoral concentration. Leasing across a
spectrum of industries reduces the risk of impairment in the asset quality. Strict credit
policies and continuous monitoring of the portfolio are looked upon favorably by credit
rating companies and accounts are reviewed closely to establish a company's exposure in
each sector, which if exceeds 20% of Net Investment in Leases (NIL) prompts a further
examination. Similarly, a drag on ratings may occur if exposure to a single client exceeds
15% of total equity. SECP is paying increasing attention to this factor and has recently
proposed an amendment in the rules that govern the leasing sector by restricting
exposure to a single party to 30% of unimpaired capital and reserves instead of the
earlier limit of 20% of NIL.
STATUS: Trust Investment Bank Limited announced the completion of Rs100
million securitization of lease receivables pertaining to lease portfolio of Pakistan
Project Thesis 39

Industrial Leasing Corporation (which now stands merged into Trust Bank). The deal
marks the completion of first ever securitization transaction in Pakistan.
A press release issued by Orix Investment Bank Pakistan Limited - one of the two
advisers to the securitization, the other being AKD Securities (Pvt.) Limited - stated that
The First Securitization Trust (FST) was the Special Purpose Vehicle (SPV) through
which the securitization had been conducted. The press statement stated that all parties to
the transaction appreciated the cooperation offered by the SECP. "They further
mentioned that the State Bank of Pakistan was also considering guidelines for the
securitization of receivables which when approved would enable the financial
institutions to invest in SPVs.
Speaking at the signing ceremony, Ali Ansari, CEO of AKD Securities and Naim
Farooqui, CEO of Orix Investment Bank stated that with the landmark transaction, doors
were now open for Pakistan's corporates to raise financing against future cash flows.
Rashid Ahmed, CEO of Trust Investment Bank - the originator, mentioned that
securitization of his company's lease receivables would usher in a new era for leasing
business in Pakistan. National Discounting Services Ltd (NDSL), a subsidiary of the
National Bank of Pakistan, is the trustee for the Asset Backed Certificates (ABCs) issued
by the SPV.
Project Thesis 40

4.1.5 REAL ESTATE SECTOR
(ASSOCIATED CONSTRUCTORS LIMITED)
Nature of Transaction
Future flow securitization of receivables arising from a construction project
Issue Amount: Rs. 100m
Tenor: 30 months
Placement Type: Private
Originator & Servicer: Associated Constructors Limited
Primary Obligator: Pakistan Defense Officers’ Housing Authority.
SPV Trustee: Crescent Leasing Corporation Limited
Investor Trustee: First Dawood Investment Bank Limited
Overview of the Originator
ACL was incorporated in 1966 as an unlisted public company engaged in the business of
civil engineering and construction and has completed multifarious projects including
construction of power and industrial plants, road and bridges, transmission, lines, oil and
gas field development, salinity control etc.
Transaction Summary:
The proposed ABS Certificates amounting to Rs. 100m will be issued by Development
Securitization Trust (DST), a Special Purpose Vehicle (SPV) formed under the Asset
Backed Securitization Rules 1999. The issue is securitized against designated future flow
receivables arising from the contract for six towers of Creek Vistas Towers in the Creek
City Project being executed by Associated Constructors Limited (ACL), the originator.
The contract agreement of the project is with the Pakistan Defense Officers’ Housing
Authority (DHA). The proceeds of sales of receivables will be utilized by ACL in the
purchase of specialized construction equipment for the project.
Future receivables, i.e. 40% of the originator’s present and future receivables based upon
the contract excluding the receivables that have already been realized prior to the closing
Project Thesis 41

date, are expected to amount to around Rs. 477.72m. They will be routed through a
collection account to be maintained by the SPV trustee from which deductions will be
made for payments to the investors. A reserve fund equivalent to one installment will
also be created initially from the proceeds of the certificates. It may be increased to two
installments by the SPV Trustee if for two consecutive months project gross cash flows
fall short materially from the Projected Service Schedule provided by ACL. An exclusive
charge on the equipment being bought by ACL will form the security against
performance risk. The ABS Certificates will have a tenor of 30 months including three
months initial grace period on principal and interest payments. Debt servicing will be in
quarterly installments with nine equal principal repayments at a rate of KIBOR + 4%
with a floor of 7.50% and no cap.
Rating Rationale:
The rating of the ABS Certificates is based on the quality of receivables, the structure of
the transaction and the credit quality of ACL. In the absence of a potential backup
servicer, cash flow generation is dependant upon the performance of the originator in
carrying out the contract. The assigned cash flows are projected to provide over-
collateralization of over 4.0x to debt servicing requirements to cover the risk of both time
and cost overrun. Where cost considerations are considered, ACL is of the view that it
will benefit from the subsequent reduction in prices of non-pass through items. Presence
of a reserve fund is an additional source of comfort. ACL possesses diverse and vast
experience in carrying out construction activities. Our meetings with their past customers
also established that they enjoy a sound reputation in terms of quality and reliability.
However this is the first time they are venturing into a residential project of this
magnitude. Currently, this is the sole major project in which they are involved. ACL
operates at a very low debt leverage level in view of erratic cash flows associated with
the construction business and has been assigned entity ratings of BBB-/ A-3.
Category Latest Previous
ABS BBB- BBB- *
Certificates Sept. 27, ‘04 Sept. 08, ‘04
Outlook Stable Stable
* Preliminary
Project Thesis 42

4.1.6 PETROLEUM SECTOR:
(ORIENT PETROLEUM INC. – PAKISTAN BRANCH)
Nature of Transaction
Securitization of future receivables i.e. proceeds of sale of gas and condensate production
of designated fields of Orient Petroleum Inc.-Pakistan Branch.
Issue Amount: Rs. 1 billion + 500 million green shoe option.
Tenor: 5 Years
Originator & Servicer: Orient Petroleum Inc. Pakistan Branch.
Primary Obligator: National Refinery Limited.
Pakistan Refinery Limited.
Sui Southern Gas Company Limited.
Trustee: To be decided
Overview of the Originator
Orient Petroleum Inc. is incorporated in the state of California, United States of America,
with the Head office in Houston, Texas and a branch office in Islamabad. The Pakistan
branch in engaged in exploration, drilling, production and sale of petroleum, natural gas
and LPG. The company was taken over by Hashoo Group in 1995. It is joint venture
operator in the North Porwar, Soan, Ratana, Mirpur Khas and Khipro Petroleum
Concession blocks and is a partner in non operated Meher Block of Petronas Carigali and
Sinjhoro Block of OGDCL where recently six discoveries were made.
Transaction Summary:
The proposed TFCs of Rs. 1,000 m with Rs 500m green shoe option will be issued by
Naimat Basal Oil & Gas securitization Company Limited (NBSC), a Special Purpose
Vehicle for a tenor of five years. These are backed by the US dollar denominated future
receivables, with a cap of Rs 2,041 billion, arising from the sale of upto 0.52 MMBO of
condensate and 38.80 BSCF of gas from three producing fields i.e. naimat Basal, Siraj
South and Ali, where Orient Petroleum Inc. – Pakistan branch (OPI) is operator.
Project Thesis 43

Suibsequent to the early well testing currently underway, the Government of Pakistan
will assueme the role of the primary buyer of the production of the designated fields.
GOP will in turn assign this production to National Refinery Limited and Pakistan
Refinery Limited (condensate) and Sui Southern Gas Company Limited (gas). These
companies will make direct payments into the collection account to be operated
exclusively by NBSC for monthly debt servicing and for meeting its administration
expenses. A reserve fund equivalent to three installments principal and interest payment
will also be maintained. It may increased on NBSC’s discretion to a maximum of six
instrallments equivalent payments, if for two consecutive months the production in the
fields falls below the “Projected Production Schedule” (PPS) provided by OPI by 15% or
more.
Debt servicing will be in monthly installments with 3% of the principal to be redeemed
in six months and remaining 97% in 54 equal monthly installments at a coupon rate of
Average Ask Rate of six months Karachi Interbank Offer rate + 2.5% with a floor of
7.50% and a cap of 13.00%. The TFCs will be listed on the Karachi Stock Exchange.
Rating Rationale:
The ratings are based on the quality of receivables, the structure of the transaction and
the credit quality of OPI as servicer and originator.
• The bankruptcy remote nature of NBSC arising from its legal status as an SPV
with limited scope of operations and true sale of assigned future receivables to
NBSC.
• The projected cash flows fro the assigned producing fields provide over
collateralization of around 3.0x to debt servicing requirements to cover the risk of
adverse fluctuations in production level, price and the exchange rate. Also the
projections have been based on very conservative price assumptions.
• Presence of reserve fund.
• Assured market for gas and condensate production due to the limited market
supply and strategic importance of the product.
• The quality of the receivables has been assured with good track record of
performance of the buyers.
Project Thesis 44

• If OPI is unable to continue production for any reason, there is high probability
that the GoP will assign a Back up operator to ensure steady production flows
due to the strategic nature of the asset.
• OPI is involved in exploration and production activities in Pakistan and operates
with a sound technical team. It has substantial proven recoverable reserves which
are expected to generate strong cash flow stream during the next ten years. OPI’s
medium to long term entity rating is A (single A) while short term rating is A-1
(A One).
Category Latest Previous
TFC-S* A+** N/A
Rs. 1,500m SEP 13, 04
Outlook Stable N/A
*Securitized **Preliminary
4.1.7 PAKISTAN INTERNATIONAL AIRLINES:
Pakistan International Airlines has struck a deal with Citibank for securitization of
domestic aviation future flows but the transaction has not been successfully executed.
The sources at Pakistan International Airlines have not revealed the information due to
the secrecy regarding the events.
However, it is concluded that all the other securitization transactions have been carried
out successfully and satisfactorily which shows its strong status in the Pakistani market.
4.2 FITCH RATING FOR PAKISTANI ENVIRONMENT FOR
SECURITIZATION:
International Special Report: Structured Transactions in Emerging - Market
Stress—Update 2003
1998 Crisis
Following its nuclear tests in May 1998, Pakistan was immediately hit with international
economic sanctions and a suspension of multilateral lending. As a result, the government
Project Thesis 45

was under severe pressure because of its dependence on bilateral assistance and
multilateral agency financing for a significant portion of its external borrowing. By
freezing private-sector activity, Pakistan tried to stave off a sovereign default, but by
August 1998, the government had defaulted on external debt payments to certain
bilateral and commercial creditors. By November that same year, Pakistan defaulted on a
eurobond interest payment. During 1999, the government of Pakistan restructured
US$877 million in commercial loans and negotiated a rollover of US$3.3 billion in
credits under the Paris Club. Additionally, the International Monetary Fund (IMF) agreed
to a US$1.5 billion loan.
Recovery Since 2001
Although Fitch has never maintained a sovereign rating for Pakistan, if a rating were
assigned in 2001, it would likely have fallen in the ‘CCC’ range. This rating would have
been based on the relatively weak balance of payments and fragile external liquidity at
the time. However, since late 2001, Pakistan has been readmitted to the international
financial community, enjoys good relations with the United States and is fully engaged
with the IMF and the World Bank. If Fitch were to again consider a sovereign rating, it
would more likely fall in the ‘B’ range. Other improvements in the country are due to the
new civilian government, elected in October 2002, which has provided much greater
macroeconomic stability. The balance of payments has been transformed by a
combination of external debt relief and high levels of remittances and private capital
flows from abroad. International reserves now stand at a historical high of US$8.8 billion
(as of February 2003), compared with barely US$1 billion in mid-2001. The new
government has also remained broadly on track with the IMF program and professes to
be committed to a broad range of structural reforms. Still, public and external
indebtedness remain high, and tax reform, financial sector reform and privatization are
pressing issues. Additionally, there are risks involved with a new government struggling
to establish a track record against entrenched, vested interests and rising populist
pressure. Political stability in Pakistan is still tenuous, and security risks remain high in
relation to both Afghanistan and India.
Project Thesis 46

4.3 SUMMARY OF ASSET BACKED SECURITIZATION IN
PAKISTAN:
From all the discussion in the form of case studies on various sectors regarding the asset-
backed securitization in Pakistan, it can be summarized that sovereign risk (political risk,
legal risk, currency devaluation risk) credit risk and liquidity risk are faced by all the
companies in the sovereign countries in which they operate as the countries come under
economic stresses. The sovereign will take actions that might interfere with the
continued operations of the company. These risks create a cap on the ratings of the
issuer. However this risk is not a constraining factor for companies domiciled in highly
rated countries.
The driving force in the development of future flow securitization structure was the need
to mitigate sovereign risk for highly rated issuers in emerging markets. After successful
mitigation of sovereign risk, the structure will be reliant on the originating entity to
continue to produce the product or services that will generate the hard currency cash
flows necessary to pay the interest and principal on the transaction. The asset generation
risk inherent in these deals means there is a component of credit risk associated with the
issuing institution.
From the above discussion and the information taken from the visit to various
organizations it has been noted that the government has tried its level best to achieve the
sovereignty in the country so that the conducive environment for the business can be
maintained. There was more focus on the political stability, the stability in economic
policies for the businesses, the more regularized laws in the country and the economy has
been controlled and directed in a much planned manner. The ultimate goal was to
achieve the business friendly environment where innovations can be brought, encouraged
to get implemented for the growth and stability in the country. It can also be cleared from
the above illustrations that more asset backed securitization transactions have been
executed successfully after regulating the economy. This shows the investors confidence
in the economy, business activities and other investment venues. Now the people are
more interested to come up with innovative solutions to accelerate the growth pace in the
Project Thesis 47

country. The laws relating to various business activities have been revised and every
thing is likely to put in a planned way.
This research outcome identifies not only the implementation of the Asset backed
securitization in other business sectors including Railways, Pakistan International
Airlines, WAPDA, SNGPL, Toll receivables, Leasing companies and Insurance
companies but also the development of Mortgage Backed Securities market in the
Pakistan, establishment of Fixed income market in Pakistan for the banks and DFIs’. The
asset backed securitization should continue the future receivable including Credit Card
Receivables, Trade Receivables, Revenue Receivables, Automobile Leases, Future
royalties, Bridge Tolls and Rent & Income Receivables
The future however, is encouraging following the 2002 Guidelines. DFIs are preparing to
consolidate the market while the SECP assures the facilitation of a strong Mortgage
Backed Securitization market having registered a 75% increase in bank housing finance
schemes since the issue of the guidelines in November 2002. There are also indications
from the SECP and a Japanese holding company towards negotiating the securitization
of small & medium enterprise receivables which analysts say, promise higher yields.
Recent technical assistance by the Asian Development Bank has enhanced capacity to
generate revenue amongst SMEs which capture a fairly large export market in Pakistan.
Project Thesis 48

CHAPTER FIVE
SUMMARY OF FINDINGS
AND CONCLUSION
Project Thesis 49

CHAPTER NO 5: SUMMARY OF FINDINGS AND
CONCLUSION
5.1 SUMMARY OF FINDINGS
The findings of the research conducted are:
1. The motivation regarding adopting the asset-backed securitization was to raise
cash, improving the working capital for the business, paying of the huge debts
and borrowings, managing the position of balance sheet by improving the assets
and liability position of the company.
2. Asset-backed Securitization has improved the credit rating of the companies as
the liquidity and profitability position improves.
3. The future flows of receivables are available today at lower cost than the other
borrowings so it attracts the originators of the securitization.
4. This availability of the cash improves the liquidity position of the company and it
enables the company to meet its operational expenses and further expansion by
investing in the capital assets.
5. The Securities and Exchange Commission of Pakistan and State Bank of Pakistan
has designed and supported to implement the innovation solutions for the
business risk so it has become attractive to the companies to adopt new solutions
for the growth of the business.
6. This has improved the asset and liability management structures of the companies
as the companies can pay its outstanding loans and provisions.
7. There is a credit risk involved in this mechanism; to deal with; a surplus fund has
been created to get assured the payment from the originator.
8. On the basis of quality of the receivables the credit rating is done so that investors
may be well clear about the financial and operational conditions of the
companies.
Project Thesis 50

9. The improved credit rating helps the company in carrying the future businesses of
the company and also increases the lines of credit.
10. There are still up to some extent legal issues for example taxation issues which
have not been addressed by the regulatory authorities i.e. Central Board of
Revenue, Securities and Exchange Commission of Pakistan and State Bank of
Pakistan.
11. There is a Successful completion of transactions of Pakistan Industrial Leasing
Corporation and the Pakistan Telecommunication Transaction is nearly to be
completed.
12. There is a successful implementation of asset backed securitization in Pakistan as
all the companies are effectively managing according to Securities and Exchange
Commission of Pakistan requirements for it.
13. There is an encouraging position of asset backed securitization in Pakistan as the
capital market is going to be expand and the KSE 100 index crossed the 7000
points which ultimately showing the investors’ confidence over the corporate
sector performance and more satisfaction to the overall economic position in the
country.
14. The success of the asset backed securitization has led the development of
Mortgage Backed Securitization in Pakistan. As a result of this, the Government,
Banks, Development Financial Institutions and other private sectors are
encouraged and attractive to design the legal framework to carry out the
mortgage backed securities of house financing and other mortgages in Pakistan.
Project Thesis 51

5.2 CONCLUSION
Pakistan is expected to see a marked increase in structured finance and successful
transactions would inevitably spread out over a broad range of sectors. The call to
foreign investors to inject funds and repatriate profits rings out clear as ever as the newly
elected government tries to exercise its mandate. The growing market of trading
corporations, banks, extractive industries and manufacturers has begun engaging legal
counsel and accountants to carry out feasibility studies and documentation for a variety
of future flows including oil & gas royalties and credit card receivables. Although the
recent divestiture by Fitch and the IFC from PACRA may be cause for concern, the
SECP is confident that good governance and rating processes installed at PACRA and
JCR-VIS are sufficient to secure the investor. This has led the development and strong
growth of Asset-Backed Securitization in Pakistan. As the investors’ confidence has
been regained therefore they are interested to invest in the innovative financial
instruments in the market. There is an increasing trend of asset backed securitization in
Pakistan from the last three years; the main reason is the existence of the securitization
rules and regulations in Pakistan which is providing guidelines for the growth and
development of ABS in the various other sectors in near future.
In order to make issues more flexible and affordable for the investors, issuers are adding
different features from shelf registration to the green shoe option to TFC structure. Use
of shelf registration implies that the issuer can split the TFC issue into tranches, which is
useful for periodic financing requirements of the issuer and also allows optimal pricing
of the individual tranche. Similarly, the green shoe option allows the issuer the right to
retain the over subscribed portion of the IPO. However, the issuer has to specify the
amount it would retain under this option in advance. A very interesting development is
the gradual evolution is the pricing structure of the TFCs. Starting from the plain vanilla
structure with fixed coupon rates, the market has witnessed an increasing number of
bonds with floating structures.
The prospects for the securitization of existing assets in Pakistan are favorable as the fact
that present volume of eligible assets is relatively high. Securitization laws enacted in
Pakistan in the 1999 have served as catalysts for change, since they have helped spawn
the right environment for credit-originating institutions. Mortgage foreclosures or
auctions are not now allowed in Pakistan, and so banks are not participating in the
Project Thesis 52

Mortgage Backed securitization which is expected to be approved in the near future for
the House Finance and other Loans. Investors are now likely to be more interested in
investing in MBS and ABS in Pakistan than in the past."
5.3 RECOMMENDATIONS
These are the following recommendations for the development and growth of Asset-
Backed Securitization in Pakistan:
• The Asset Backed Securitization rules are needed to be better defined in the
scope of activities.
• The Securities and Exchange Commission of Pakistan should allow wider scope
for the asset backed securitization i.e. not only limited to the future receivables
but also the loans including credit card loans, mortgage loans and auto loans etc.
• The taxation issues regarding the Special Purpose Vehicle to be resolved or it
should be tax exempted.
• The Banks and Development Financial Institutions should be allowed to take part
in the asset backed securitization process more freely.
• The organizations are to be encouraged to adopt asset backed securitization
especially in the Small and Medium enterprises as there is lack of legal
framework for the SME’s participation in asset backed securitization.
Project Thesis 53

Abs pakistan feb05

Empfohlen

Empfohlen

Weitere ähnliche Inhalte

Was ist angesagt?

Was ist angesagt? (20)

Ähnlich wie Abs pakistan feb05

Ähnlich wie Abs pakistan feb05 (20)

Kürzlich hochgeladen

Kürzlich hochgeladen (20)

Abs pakistan feb05