IIFL CEM (Credit Enhanced MLD) Instrument: IIFL MLD-2021-G2 Credit Rating: CRISIL PP-MLD AA+r (CE) Principal Protected - Credit Enhanced - Market Linked Debenture
Factors impacting Debt investment decision by Investors Credit / Default Risk: Credit market has been stung by a yearlong shadow banking crisis that started with shock defaults last year by IL&FS group. The crisis further got exacerbated by missed payments by firms including non-bank financiers DHFL & Reliance Capital, travel planner Cox & Kings Ltd. and wind-turbine maker Suzlon Energy Ltd. Decreasing Interest Rates: Rate cuts by RBI in-line with lower inflation numbers and benign inflation expectations has brought interest rates lower with expectations of further rate cuts moving up. Repo rate at 5.15 percent is the lowest since March 2010 Banks have reduced their FD rates in line with lending rates and 10-year bond yields have fallen to 6.7% Current return scenario of Traditional Investment avenues for 18 to 24 months Investment Option Average Returns (Pre-tax) Credit Risk Taxation * Arbitrage Funds 6 - 7% Nil 10% LTCG Bank FDs 6 - 7% Low Taxed at MMR Ultra Short-Term Funds 6 - 7% Low – Medium Taxed at MMR Short-Term Funds 7 - 9% Medium-High Taxed at MMR *applicable cess & surcharge extra 2
Introducing IIFL Credit Enhanced Market Linked Debentures (CEM) Traditional Investment Products are currently offering low to medium returns with medium to high level of safety. Corporate Bonds, NCDs and Credit risk MF schemes that offer higher return in 1-2 years horizon carry higher Credit Risk / Default Risk What if investors have an option to get attractive yields with higher level of safety? Introducing IIFL Credit Enhanced Market Linked Debentures (CEM) - with High safety (AA+ rating) and High pre-tax IRR of 9% for average tenure of 18 - 24 Months !!! 3
Credit Enhanced MLD - Market Linked Debenture A Principal Protected, listed & Rated Market Linked Debenture (Rated AA+ r (CE) by CRISIL) Issued by India Infoline Finance Ltd. (Rated AA by CRISIL) Gold loan receivables originated by IIFL and assigned to the SPV with an initial cover of 1.25 times the issue size and an extra collateral in the form of Bank Guarantee (7% of issue size) A pre-tax IRR of 9.00% p.a. (7.72% p.a. post-tax ... assuming LTCG of 14.25% ) with maturity ranging 18 months – 24 months Payoff: IRR of 9% Final Value > 50% of the (after factoring in Principal + Coupon Initial value Principal Repayment) Final Value <= 50% of the Get IRR of 0% Initial Level Principal back Initial Value = Clean Price of underlying security on Trade Date Final Value = Clean Price of underlying Security on date falling 5 BD prior to the date on which the entire Principal is repaid Underlying Index / Security : 7.26% GS 2029 (10yr G-Sec) 4
Issue Structure Securitised & Payout MLD 1 MLD issued secured Payout secured Gold Loan 1 Collateral – Gold Loans MLD 2 Investors Borrowers IIFL Gold Loan 2 Payout secured SPV Finance Collateral – Gold Loans MLD 3 Payout secured Gold Loan 3 Payout secured Interest + Principal received on Gold Loan IRR @ 9% at the end of MLD Diagram is given is for illustration purpose 5
Criteria for Gold loan identification Minimum seasoning – 3 months Maximum tenure – 11 months Geography distribution – max 25% per state (region) Per customer exposure will be capped at 1% Weighted average balance tenure of the pool at all time will be less than 6 months Average LTV (on Gold Value) for disbursements in March 2019 stood at 71.9% as against 70.5% in March 2018 6
Illustrative Cashflows - IIFL CEM • Cashflows (interest / principal) received from Gold Loans post 12 months of issuance will be used to partly pay down principal of the MLDs • Coupon amount subject to realization of market condition, will be paid only at maturity. Month Cashflow Comments 0 -100 Invested in MLD 14 10 15 15 Principal repaid in multiple tranches (only for illustration) 16 20 Payment schedule will differ 17 20 18 35 24 13.33 Coupon (interest) repaid* Investor XIRR 9.00% The above table is for illustration purposes only. The actual interest payout will be determined based on the actual payout schedule and yield fixed at 9% p.a. (pre-tax, after factoring-in principal payment) 7
Why one should invest in CEM? (1) Credit Enhancement Instrument rated AA+ r (CE) by CRISIL over the issuer (IIFL Finance) rating of AA by CRISIL , because: MLD issued is bankruptcy remote i.e. Investor is not subject to the credit risk of the issuer Guaranteed by SPV, which will service cash flow if not paid by the issuer SPV holds Gold Loans worth 1.25x of Nominal Value of the Debentures issued throughout the tenor of MLD Extra collateral in the form of Bank Guarantee (@7% of the issue size) will be provided to the SPV by the issuer Lock-in High Yields Pre-tax IRR of 9% p.a. - attractive for average tenure of 18-24 months Tax Efficient Wrapper Listed secured NCD - Capital Gains arising from the sale of NCD taxed @ 10% + applicable surcharge & cess* * Taxation Laws may change as per applicable regulations at the time of maturity 8
Why one should invest in CEM? (2) Secured by Gold Loans A secured loan in which a customer pledges his/her gold ornaments as collateral with Gold Loan Company The Company in turn gives a loan amount (typically 70%) as per the market value of gold to the customer Gold loan as a product has the lowest NPA rates IIFL Finance as an Issuer Established player in Gold loan against gold business with an operational track record of almost 9 yrs Loan Tenors ranging majorly within 9 to 12 months tenure bucket with principal repaid at maturity Has right to auction gold and recover the loan amount if interest / principal is not paid for 90 days Current Loan portfolio being 6,195 crores: with the 180+DPD (Days Past Due) being 0.2% in FY19 Avg LTV (on Gold Value) for disbursements in March 2019 stood at 71.9% as against 70.5% in March 2018 9
Who should invest in this product? Looking for a product that can potentially offer higher fixed return than Bank FDs Looking to benefit from the favorable taxation rate* of 10% Capital Gain tax Vs 30% for Bank FDs and other short term debt instruments Looking to invest for tenure of 18 / 24 months with high level of safety Looking for Principal protection as product feature Looking for regular cash flow after a Year * Taxation Laws may change as per applicable regulations at the time of maturity 10
Key Terms to be considered by the investor Terms Description Issuer IIFL Finance Credit Rating of the Issuer AA by CRISIL Instrument Credit Enhanced Market Linked Debenture Credit Rating of the Instrument AA+ r (CE) by CRISIL Tenure 18M/24M Return (XIRR) 9% p.a. (based on pay-off) Benchmark / Underlying 7.26% GS 2029 Collateral Gold Loan Pool and Bank Guarantee Liquidity Listed on NSE - hence tradable The actual interest pay-out will be determined based on the actual pay-out schedule and yield fixed at 9% p.a. (pre-tax, after factoring-in principal payment) 11
Key Terms to be considered by the investor Terms Description Initial Level Clean Price of underlying security on Trade Date Clean Price of underlying Security on date falling 5 BD prior to the date on which Final Level the entire Principal is repaid If Final Value >50%*Initial Value then Principal + Coupon (TBD); Else only Principal Initial Value = Clean Price of underlying security on Trade Date Pay-off Final Value = Clean Price of underlying Security on Trade Date+18M Underlying Index / Security : 7.26% GS 2029 (10yr G-Sec) Face Value per Debenture 10 Lacs Issue Size Rs. 400 Crores Min Investment Amount 10 Lacs & further in multiple of 10 Lacs 12
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