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CMA Final · Strategic Financial Management · Securitization

A finance company securitises a pool of Rs 120 crore that it sells to an SPV for Rs 126 crore, reflecting the present value of the pool's excess interest. The company also incurs transaction costs of Rs 1.5 crore and provides a cash collateral of Rs 6 crore that is expected to be fully recovered at the end of the structure. Ignoring time value on the collateral and tax, what is the net gain on sale at origination, treating the collateral as an asset retained?

The net gain is the sale price of Rs 126 crore less the carrying value of Rs 120 crore and transaction costs of Rs 1.5 crore, which gives Rs 4.5 crore. The collateral is recoverable and so is neither a cost nor a gain.

  1. ARs 4.5 croreCorrect
  2. BRs 6.0 crore
  3. CRs 10.5 crore
  4. DRs 12.0 crore

Explanation

Gain = sale price - carrying value - transaction costs = 126 - 120 - 1.5 = Rs 4.5 crore. The cash collateral is only funded from the proceeds and recovered later, so it is not a cost. Rs 6.0 crore ignores the costs. Rs 10.5 crore wrongly adds the collateral to the gain.

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