Swapping of Loans and Debts with Cagamas Debt Securities
As an additional avenue for the seller to sell loans and debts to Cagamas without having to endure negative carry in an excess liquidity environment, the seller can opt to sell their loans and debts and receive debt securities issued by Cagamas to fund such purchases instead of cash.
In the event the seller of loans and debts is unable to hold the entire amount of debt securities issued under the asset swap arrangement due to Single Customer Credit Limit (SCCL) imposed on investors, if applicable, the debt securities may be placed with any party within the same banking group of the seller in addition to the seller of the loans and debts.
The following diagram describes the structure of the transaction:
The impact of reduction in negative carry of a selling institution entering into an asset swap arrangement with Cagamas is illustrated below:
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Swap with Cagamas Debt Security
|
|
| |
% |
% |
% |
| Return from Loan Portfolio 1 |
5.50 |
5.50 |
- |
|
 |
| Payment to Cagamas 2 |
(4.10) |
(4.10) |
- |
| Return from Reinvestment 3 |
3.00 |
3.90 |
- |
|
|
| Negative Carry |
(1.10) |
(0.20) |
0.90 |
|
|
| Net Return |
4.40 |
5.30 |
0.90 |
|
|
| |
1 |
The return from seller’s fixed rate loan portfolio is assumed at an effective rate of 5.50% p.a. |
2 |
The seller is assumed to sell its debts to Cagamas for a period of 3 years. |
3 |
Cash received from the sale of debts to Cagamas is assumed to be invested in the interbank market. Return from the Cagamas debt securities received from the sale of loans and debts is assumed at 3.90% p.a. Capital cost on reinvestment is not taken into consideration. |
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