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CA Final · Advanced Financial Management · Securitization

Orchid Finance sells receivables of Rs 50 crore to an SPV for Rs 46 crore cash, with excess spread flowing back to Orchid. The pool yields 12% p.a. on Rs 50 crore. The SPV pays investors 9% p.a. on the Rs 46 crore it raised and pays the servicer 1% p.a. on Rs 50 crore pool balance. Ignoring losses and other costs, what is the annual excess spread retained, in rupees?

Excess spread is Rs 1.36 crore. Pool interest of Rs 6 crore (12% of 50) less investor coupon of Rs 4.14 crore (9% of 46) less servicing fee of Rs 0.50 crore (1% of 50) leaves Rs 1.36 crore for the originator.

  1. ARs 0.86 croreCorrect
  2. BRs 1.36 crore
  3. CRs 0.36 crore
  4. DRs 1.86 crore

Explanation

Pool interest = 12% x 50 = 6.00 crore. Investor coupon = 9% x 46 = 4.14 crore. Servicing fee = 1% x 50 = 0.50 crore. Excess spread = 6.00 - 4.14 - 0.50 = 1.36 crore. Check: 1.36 is the figure; so the correct option is Rs 1.36 crore, and Rs 0.86 crore wrongly deducts the fee twice.

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