1. Securitisation Summit 29th November 2001 A Case Study by Simon Stockley

3. “ Banking establishments are more dangerous than standing armies” Thomas Jefferson “ Except for con-men borrowing money they shouldn’t get, and widows who have to visit with handsome men in the trust department, no s ane person ever enjoyed visiting a bank” Martin Mayer

4. What is SA Home Loans? The first South African company to discount home loans on a national basis .  The first S outh A frican company to fund its loan book through the internationally recognised practice of “securitisation . ”  The first S outh A frican company to operate with a transparent pricing policy with regard to home loans . 

5. What is SA Home Loans? It is a management organisation that links institutional investors with borrowers .  The company is owned by Peregrine Holdings Limited, Chase JP Morgan, Standard Bank, International Finance Corporation (the commercial arm of the World Bank), International Bank of SA (co-owned by Banque Nationale de Paris & Dresdner Bank), and Management. 

6. SA Home Loan Shareholders

7. Number of loans processed : 1 5 000 Value of loans processed : R 5 billion Value of loans approved : R 2 billion Breakdown by region : Gauteng 30% KZN 35% W Cape 35% S outh African Home Loans Activities since launch: February 1999 (As at 01 November 2001)

8. Definition… Securitisation Defined “ The packing of individual loans and other debt instruments, converting the package into a security, enhancing its credit for the further sale to a third party.” Kendall

9. Securitisation Defined The conversion of illiquid individual loans to marketable securities, which are generally asset backed. The effect then is …….

10. Securitisation Defined In practical terms … Securitisation pulls apart financial transactions and allocates the risk and rewards to those entities that are best able to accept and therefore price for them.

11. Securitisation Defined But what does securitisation actually do ……. Gets more money into the economy to lend.  Gets more money into the country to lend.  Allows for cheaper funding so consumers benefit.  Allows for diversified funding options and pricing for risk so investors benefit. 

12. Securitisation Defined Continued …... Bypasses the traditional intermediaries and links borrowers directly to money and capital markets.  Disintermediates the entire financial market and encourages competitive forces. 

13. Securitisation Some Facts Securitisation is America’s most reliable source of low cost finance.  In the USA, half of all home loans are presently funded through securitisation and one fifth of motor and credit card receivables.  In 1998 half of Chryslers corporate debt was funded through securitisation. 

14. The pace of growth in structured products continues to attract substantial global investor interest Total Issuance Average annual growth of 32%

16. Securiti s ation Market Size Western Europe $31 billion Latin America $1 billion Asia $9 billion Non-US Asset Backed $41 billion in 1997

17. RESIDENTIAL MORTGAGES Geographic Expansion & Product Innovation Securiti s ation EXPORT RECEIVABLES STUDENT LOANS DELINQUENT TAXES ENTERTAINMENT RECEIVABLES HEALTH CARE RECEIVABLES SUB-PRIME AUTO LOANS SOCIAL HOUSING LOANS EMBEDDED VALUE UTILITY RECEIVABLES LOTTERY RECEIVABLES ROAD TOLLS BOAT LOANS EQUIPMENT LEASES INSURANCE PREMIA RV’s HOME EQUITY LOANS TRADE RECEIVABLES AUTO LOANS SMALL BUSINESS LOANS CREDIT CARDS COLLATERAL MORTGAGE OBLIGATIONS COMMERCIAL MORTGAGES 1970’s Early 1980’s Mid 1980’s Late 1980’s Early 1990’s Mid 1990’s USA UK Canada FRANCE SPAIN NETHERLANDS VENEZUELA MEXICO GERMANY, ITALY, TURKEY, ARGENTINA, BRAZIL, INDONESIA, MALAYSIA, THAILAND, SOUTH KOREA, PHILLIPINES, CHINA ETC.

18. Domestic Securitisation dates from 1989… R250 million (United Building Society, pt of ABSA Group). Bank mortgages .  1989 R85 million (Sasfin Ltd): Corporate lease rentals .  1992 National Housing Finance Corporation (announced). Non-bank mortgage for lower & middle income groups .  1997 2000 SA Home Loans. Non-bank residential mortgage securitisation. (R1.25 Billion)  2001  This year has seen a breakthrough in South Africa Kiwane. R450 million in AA-rated collateralised debt obligation.

19. Structural Impediments Banks - cash rich.  Big is best.  Rating agencies.  Exposure to international markets.  Historically little incentive for banks to securitise. 

20. Legal Impediments Banks Act.  Government Notice 153 as published in Government Gazette No 13723 - 3 January 1990 .  Tacit approval / endorsement / co-operation.  Government Notice 2172 as published in Government Gazette No 16167 – 14 December 1994.  New Regulations/Basle Accord . 

21. Origination Impediments Need to originate.  Time to originate.  Registration process. Costs of transferring assets.  Cost associated with origination. 

22. Information Technology Impediments Lack of silver bullet applications.  Costs.  Integration. 

23. SA Home Loans A case study The product.  Its positioning.  Funding. 

24. The Product 20 year, variable rate, reducing term mortgage.  No prepayment or redemption penalties.  Discounted legal and administrative fees.  No ongoing administrative charges.  Re-advance facility twelve times a year.  Fixed margin above cost of money. 

25. Positioning

28. How much will I save monthly? Get a discount on your home loan – for life R234 R464 R703 3.00% R196 R391 R587 2.50% R157 R314 R471 2.00% R118 R236 R254 1.50% R79 R158 R235 1.00% R100 000 R200 000 R300 000 Monthly Savings

29. Reserving Requirements Bank Deposits Loans To Public Margin : 4 - 5% Traditional Bank Funding

30. Control Public Special Purpose Vehicle Trust Loans To the Public Senior Securities Subordinated Securities Purchase Securities Independent Trustee External Auditor Origination & Management Fee : 0.5% JIBAR Rate Plus 2.1% 1.6% Yield pick up Securitisation Structure Institutional Investors

31. Proposed SAHL Legal Structure Public Public Public Public Public SPV SPV SPV Senior MBS Junior MBS Senior MBS Junior MBS Senior MBS Junior MBS Short Term Insurer Life Insurer SAHL Interim Funder External Directors Auditors MARKET MAKER INVESTORS INVESTORS SECURITIES AND AGREEMENTS THE PUBLIC SA HOME LOANS SPECIAL PURPOSE VEHICLES MORTGAGE BACKED SECURITIES INSTITUTIONAL INVESTORS

32. Investment Structure Public Loans JIBAR + 2.1% MBT 1 Special Purpose Vehicle R1 Billion A Class 92 % AAA Rating JIBAR + 20/100 Points B Class 8 % BBB Rating JIBAR + 200/300 Points C Class 2.5 % Unrated Pay away 1.6% to investors SAHL 0.5% Management Fee Standard Bank Deloitte & Touche Standby Administrator

33. General Observations True sale to remove from balance sheet and to make insolvency remote.  Quality of asset pool.  Role of rating agencies.  Investor support. 

34. Will Investors buy? Yield enhancement.  Rating.  Liquidity.  Portfolio diversification.  Privatisation/shortage of quality script. 

35. The Strategic Advantages Diversify funding base – access to new sources of funding – less reliance on bank lending.  Lower cost of funding to originator and consumer.  Allows unrated / poorly rated originators to access capital markets.  Off balance sheet treatment/Capital relief. 

36. The Strategic Advantages Continued ... Optimises the use of scarce capital resources.  Transcend the sovereign risk ceiling.  Allows pricing for risk. 

37. Securitisation is increasingly being used as a tool to achieve the issuer’s broader objectives Credit management By selling assets, some institutions are able to reduce their exposure to certain industries &/or names Alternative &/or cheaper finance In some cases, ABS issuers achive ratings above their unsecured or country ratings. Issuers can also benefit from investor diversification Grow assets under management Using CBOs, fund managers can increase funds under management without inflating the balance sheet Capital Relief Securitized assets are sold into a vehicle for off balance-sheet treatment, thereby releasing capital held against them Maximise Capital Efficiency Improving Return on Equity & managing regulatory capital efficiently is a growing concern among financial institutions & publicly held corporations.  Asset/Liability Management Match-fund term sheets through issuance of variety of currencies & bases.  Reduce Leverage of Balance Sheet With the proceeds of the sale of the assets, some originators may choose to pay off their outstanding debt. 

38. Why the Securitisation Model? Ability to access capital markets directly.  “ Unbank lending”.  Pricing for risk.  Funding diversification. 

39. The Way Forward Increased activity MBS market – placements.  Investor education.  Cross border applications – ability to bridge sovereign risk ceilings.  Growth secondary market – listing bond exchange.  Expansion to other asset classes.  Greater product diversification. 

40. Thank you. Simon Stockley CEO - SA Homeloans ( Pty ) Ltd Phone : (031) 560 5392 Fax : (031) 562 4266 Cell no : 083 276 0068 e-mail : simons @ sahomeloans .com