debt property swap.
asifa butt
(Querist) 04 June 2011
This query is : Resolved
can any one download agreement for debt property swap. mortgaged property is being swapped with partial debt. it is sort of foreclosure with consent also
prabhakar singh
(Expert) 05 June 2011
please visit if you are interested
but there is no free lunch: http://consusgroup.com/contracts/swap-agreements/?ref=_google.asp&awTCG=172803/&gclid=CLHyhqWEnqkCFQd76wod8
prabhakar singh
(Expert) 05 June 2011
STUDY THIS CAREFULLY MAKE A DRAFT OF YOUR OWN AS NO FREE MODEL FOUND:
DRAFT GUIDELINES OF RBI ON CREDIT DEFAULT SWAP
By Ray Parthasarathi
Reserve Bank of India (RBI) has come out with draft guidelines on Credit Default Swap
(CDS) per notification dated May 2007. The guidelines could not have come at a more
opportune time, as several players are waiting eagerly to get appropriate instruments to
manage credit risk in their portfolio.
The guidelines initially are addressed to commercial banks and primary dealers only
and the scope is limited to usage of Credit Default Swap by the banks and primary
dealers for sale and purchase of credit protection in respect of single resident reference
entity. Down the line, it seems that insurance companies and mutual funds also would
get to participate in the exciting field of credit derivatives.
For the uninitiated, credit derivatives are synthetic instruments for transfer of credit
risk in a financial transaction or a portfolio consisting of financial assets. Most
commonly used form of credit risk transfer that we in India are conversant with, is
securitization. Securitization has focus on selling assets with credit risk. Banks can sell
their loans directly or they can securitize. or pool together their assets with credit risk
and sell parts of the pool to outside investors. Either way it reduces credit risk because
the credit exposure is transferred to the new owner. Unfortunately, these methods are
insufficient for managing the credit exposure of many financial institutions.
Credit derivatives are financial contracts that provide insurance against credit-related
losses. These contracts give investors, debt issuers, and banks new techniques for
managing credit risk that complement the loan sales and asset securitization methods.
A credit derivative is usually a bilaterally entered contract. The value of the contract is
derived from the credit risk of the underlying like a bond, a bank loan, or some other
credit instrument. The value of a credit derivative is linked to the change in credit
quality of these instruments. Different variants of credit derivatives are Credit Default
Swap, Total Return Swap, Credit Linked Notes, Collateralized Debt / Loan Obligations
(CDO/CLO), both index tranched and bespoke, Credit Spread Options etc. CDOs on
CDOs or CDO2 are new variants of credit derivatives. Since most of these are well known to most of the discerning readers, we are dwelling
on the draft guidelines of Reserve Bank of India and are submitting observations
hereunder as to what according to us are required to be additionally addressed to ma k e
the world of credit derivatives in India more meaningful and in line with the expectation
of the market:
1. At the very beginning we draw attention to a statement in the draft that declares
that the document does not supersede any previous guidelines. Whi le this is
partially true, a clearer statement on why the draft guidelines of 2003 are not
pursued to logical end could have put things in proper perspective.
2. It is not also understood as to why the scope is kept limited to Banks and PDs
and that too in respect of single resident reference entity, leaving other financial
institutions and retail assets outside the purview. At a time when infrastructure
development through public private partnership is encouraged and deepening
and widening of debt market is spoken about, the option is required to be
extended to other financial institutions as well including but not limited to
registered NBFCs and institutions dedicated to infrastructure financing in
particular.
3. It is the experience of the undersigned that Public Sector Banks with overseas
presence write protections freely in respect of Credit Linked Notes referencing to
FCCBs issued by Indian corporates in the international market. It is not clear
whether the Banks will continue to be permitted to write such protections in the
international market but not in the domestic market.
4. We expected RBI to appreciate the problems of NBFCs more closely and to
appreciate that not all NBFCs that are in the business of creation of physical
assets in the country are doing so for narrow business gains. Some of them are
in the business to address the gap in the physical infrastructure of the country
that deters foreign investments to come in. Unfortunately they are in the
finishing segment of the infrastructure vertical and are not yet officially
recognized as infrastructure activities.
5. It is well known that the NBFCs, particularly Asset Finance Companies run
huge asset liability mismatches in their books in the absence of alternative
source of funding other than credit lines from Banks. In order to address this
issue they normally enter in to bilateral deals for sale of assets or undertake
vanilla securitization. Recent guidelines of RBI indirectly restricting flow of credit
to NBFC ND SI have further put such NBFCs in a spot as assets they finance are funded at a much cheaper rate in the market than the rate at which they can
raise resources from Banks.
6. In the absence of variety of players interested in loans proposed to be sold /
securitized, the counter parties are almost always banks only. Availability of
CDS to NBFCs would have afforded some alternatives (CDOs in particular) to
them to go for tranched securitization and sell them to different players
according to the risk appetite / comfort level. CDOs take a debt portfolio and
partition the credit risk to suit different investors’ demands. This is done by
placing a basket of bonds into an SPV, and issuing a series of notes against the
basket, which consecutively bears the losses on the portfolio. The arrival of the
credit default swap has enabled product structurers to replicate cash CDO
portfolios without actually using the underlying debt – the synthetic CDO.
7. From the point of view of regulatory oversight also RBI would rather like to
encourage securitization / CDOs than continuing with popular bilateral deals
where isolation of assets from the seller (true sale) and establishing bankruptcy
remoteness of seller (putting the beneficial cash flow from the sold assets beyond
the reach of the transferor, or any consolidated affiliate of the transferor, and
their creditors either by a single transaction or a series of transactions taken as
a whole even in the event of bankruptcy or receivership of the transferor or any
consolidated affiliate), appear at times to be extremely di fficult and tend to vary
from one legal expert to another. Besides, tranched securitization will attract
many players in to the debt market thereby lending solidity to its process of
maturity.
8. As far as the institutional mechanism to facilitate credit deri vative transaction is
concerned, RBI has stopped short of announcing the initiatives they are required
to take. In order to make credit derivatives attractive, it is important that indices
like the CDX and iTraxx indices are launched to serve as true benchmarks in
credit trading. Constructed as baskets of a sample of single-name default swaps
with standardized maturity dates and coupons, they instantly give the market
the liquidity it needs. Understandably Indian market does not have adequate
data to build such indices. However, our Rating Agencies are eminently
competent to provide a solution for this going forward and a role for them should
be defined in the guidelines.
9. RBI may also contemplate identification and approval of select legal firms to
undertake legal due diligence and sign off on all contracts that represent
transfer of credit risk whether through securitization / loan sales route or
through credit derivatives. At a time when Indian economy is getting integrated and transnational are evincing interests in the Indian market, such calibration
of the institutional mechanism is felt to be essential prerequisite. In this context
it may be stated that though the guidelines have referred to ISDA Master
Agreement, contemporary literature suggests that the ISDA is not to be taken as
an omnibus solution. According to Mr. Joris Vlug of Zanders & Partners, “In a
more 'volatile' world it is sensible and strongly recommended to thoroughly
negotiate ISDA schedules. At least two main items in the schedule should
receive special attention. One is the fact that the parties (especially corporates)
tend to forget that a trigger for a termination event in an ISDA schedule
automatically triggers other funding facilities through the cross default sections
in those funding facilities. The second concern is the tendency of banks to
propose a schedule, which is not realistic from the other party's point of view,
either due to stringent covenants or unrealistic terms and conditions. Remember
one important thing: an ISDA Agreement is a bilateral agreement, so you must
negotiate thoroughly.” Select legal firms may give necessary consultancy in this
context and enable deals to go through without any doubt about their
enforceability, particularly when the concept of ‘restructuring’, ‘modified
restructuring’ and ‘modified modified restructuring’ as default events create
some doubts / haziness.
10. Besides, taking a cue from SOX (Sarbanes Oxley) compliance requirements, RBI
might as well obligate entities using credit derivatives to induct in their Audit
Committees with at least one independent financial expert who is conversant
with derivatives and derivative accounting. Such members along with others in
the Audit Committee, may be requested to examine internal controls at a desired
l e vel of detail (e.g., about the structure of derivatives, the risks they hedge, the
model used for their mark-to-market , thei r hedge ef fect iveness over t ime, the
management and procedural controls between the front and back offices, and
the conformance with trading policies and limits etc). It is stated “treasurers who
are infrequent users of derivatives may not have adequate systems, controls and
processes in place. They may also be unaware of the leverage implicit in the
transactions, and could end up with transactions that have a huge negative
impact on their financial statements. The identified expert in the Audit
Committee should develop a statement that specifies what hedging techniques
and instruments should be used to support strategy. This involves de tailed
descriptions of the risk appetite, forecasted transactions, partial term hedges
and other issues. Without it the risk policy is often left to the whims of treasury
officials, who could pursue policies that are at odds with the board's wishes.”11. RBI has rightly prescribed that banks should address issues regarding conflicts
of interest while structuring CDS. For that matter it is equally important for
securitization and other credit derivatives too. Like in treasury operations, the
concept of middle office is equally important in credit derivative transactions. In
this context the prescription given by Mr. Joel Bessis in the following statement
is worth recalling: “ Even though banks have always followed well-known
diversification principles, classical emphasis of credit analysis is at the
transaction level. Portfolio analysis that has significant potential to improve risk
return trade off calls for separation of origination from portfolio management.”
12. Lastly, given the fact that process automation in different banks and PDs are at
different levels of maturity, giving across the board authority level to write
protection might not be free from risks. The more comprehensive the process
automation is the lesser is the degree of operational risk. Hence a benchmark
requirement of process automation could have been made mandatory for writing
derivative contracts.
While concluding, we draw attention to the recommendations of the Joint Forum of
Basel Committee on Banking Supervision (BCBS) on the issue of Credit Risk Transfer
(CRT) in October 2004. BCBS proposes that any CRT / player in CRT space should
satisfy the following tests:
1. Whether the instruments/transactions accomplish a clean risk transfer,
2. The degree to which CRT market participants understand the risks involved,
and
3. Whether CRT activities are leading to undue concentrations of credit risk
inside or outside the regulated financial sector.
It has also been stated, “some transactions are not really intended to transfer a large
portion of credit risk in the first place. For example, some structured transactions may
only transfer the “catastrophic” risks associated with the most extreme set of portfolio
outcomes; these risks may be more macroeconomic than credit events. It is therefore
important that all participants have a good understanding of the relevant transactions
and the circumstances in which they do and do not transfer credit risk.”
