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CA Final · Advanced Financial Management · Securitization

Orion Finance securitizes Rs 100 crore of receivables to an SPV at a discounted price. Pool details: expected collections are Rs 12 crore per year at the end of each of the next 10 years... For simplicity the pool is treated as a flat annuity. The SPV funds the purchase through Rs 70 crore senior certificates at 8% and Rs 20 crore mezzanine certificates at 12%, with Rs 10 crore of equity tranche retained by Orion with no coupon in the first year. Interest on the tranches is paid on the opening balance of Rs 70 crore and Rs 20 crore. In year 1, only Rs 11 crore is collected, of which the servicer takes Rs 0.4 crore. Payments are made in order of seniority. What amount is available for the equity tranche after the servicer fee and the senior and mezzanine interest?

Rs 2.60 crore is left for the equity tranche. Collections of Rs 11 crore less the servicer fee of Rs 0.4 crore give Rs 10.6 crore. Senior interest is Rs 5.6 crore and mezzanine interest is Rs 2.4 crore, totalling Rs 8 crore, so the residual is Rs 2.6 crore.

  1. ARs 2.60 croreCorrect
  2. BRs 3.00 crore
  3. CRs 5.00 crore
  4. DRs 1.60 crore

Explanation

Net collection = 11 - 0.4 = 10.6. Senior interest = 8% of 70 = 5.6. Mezzanine interest = 12% of 20 = 2.4. Total = 8.0. Residual = 10.6 - 8.0 = Rs 2.6 crore. Rs 3.0 crore results from ignoring the servicer fee and is wrong.

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