Leveraging Remittance Flows: An Introduction To Future Flow Transactions

LEVERAGING REMITTANCE FLOWS:
An Introduction to Future Flow

Transactions
Asian Development Bank
Manila, Philippines
March 2015
By: Stefan Hruschka, Asian Development Bank
Wan Ning Lie, Standard Chartered Bank
Jim Patti, Mayer Brown LLP
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respective jurisdictions.
Welcome!
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What is our goal for today?
Welcome!
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To describe techniques for using international
remittances to finance a nations development,

people and companies.
Welcome!
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To describe these remittances from a legal
perspective.
Welcome!
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perspective.
To discuss potential investor interest in
remittance-backed financings.
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perspective.
To discuss potential investor interest in
remittance-backed financings.
To describe the important role that
governments can play in facilitating these

transactions and enabling their populations to
benefit from these financing alternatives.
Why is this topic of interest?

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Because remittance-backed financings can:

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Be a source of medium-/long-term international
funding (five or more years),

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Promote developmental funding, including from
DFIs,

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DFIs,
Establish relationships with new investors,
including potential for AAA investors if a

guaranty is used,
10

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DFIs,

guaranty is used,
Assist in the development of a domestic
framework and experience for international

financings,
11

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DFIs,

guaranty is used,

financings,
Encourage local banks to seek additional retail
customers (e.g., the unbanked),

12

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DFIs,

guaranty is used,

financings,

Offer attractive pricing compared13to unsecured
debt, and

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DFIs,

guaranty is used,

financings,

Offer attractive pricing compared14to unsecured
debt, and
Asset Classes
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15
Asset Classes
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Remittance Flows
Worker remittances through banks
Western Union/MoneyGram payments
Credit card/mobile phone transfers
16
Asset Classes
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Remittance Flows
Commerce-related Flows
Export collections
Foreign direct investment (FDI)
17
Asset Classes
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Remittance Flows
Export collections
Tourism-related Flows
Credit card net settlement payments
Check/Travellers cheque payments
Airline/airport receivables
18
Asset Classes
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Remittance Flows
Export collections
Tourism-related Flows
Credit card net settlement payments
Check/Travellers cheque payments
Airline/airport receivables
Other Flows
19
Asset Classes
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Diversified Payment Rights (DPRs)

In remittance-backed financings, the term DPR is
widely used to define a combination of the
following previously noted categories of flows:
Export collections
These DPRs act as the collateral that is used in

numerous financing transactions. These
transactions are frequently referred to as DPR
financings or DPR future flow transactions.
20
Asset Classes
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Diversified Payment Rights (DPRs)

In remittance-backed financings, the term DPR is
widely used to define a combination of the
following previously noted categories of flows:
Export collections
These DPRs act as the collateral that is used in

numerous financing transactions. These
transactions are frequently referred to as DPR
financings or DPR future flow transactions.
Other types of flows can be included in DPR
financings, but usually they are not due to their
smaller amounts and the additional21complexity
that they add to the transaction.
Asset Classes: DPRs

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Senders
Jurisdiction
Beneficiaries
Sender
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Asset Classes: DPRs

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Senders
Jurisdiction
US$
/
oth
er
Senders
Bank
Beneficiaries
Sender
US$/
othe
r
Senders
Bank
23
Asset Classes: DPRs

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Senders Recipients
Jurisdiction Jurisdiction
US$
/
oth
er
Senders
Bank
Local
Bank
Sender
US$/
othe
r
Payment
Order
(SWIFT)
US$/other
Senders
Bank
Payment
Order
(SWIFT)
US$/other
24
Beneficiaries
Asset Classes: DPRs

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Society for Worldwide Interbank

Financial Telecommunication
(SWIFT)
International messaging system owned
and maintained by the member banks.

Over 9,000 banks in over 200 countries are
linked together through SWIFT.
Basically a sophisticated and secure
global e-mail system.

Over 15 million interbank
communications per day via SWIFT.

Highly automated and efficient
processing of remittances.
25
Asset Classes: DPRs

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Senders Recipients
US$
/
oth
er
Senders
Bank
Local
Bank
Sender
US$/
othe
r
Payment
Order
(SWIFT)
US$/other
Senders
Bank
Payment
Order
(SWIFT)
US$/other
26
Beneficiaries
Asset Classes: DPRs

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Senders Recipients
US$
/
oth
er
Senders
Bank
Local
Bank
Sender
US$/
othe
r
Payment
Order
(SWIFT)
US$/other
Senders
Bank
Beneficiaries
Local
Currency
Payment
or
Order
US$/oth
(SWIFT)
er
US$/other
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Legal Status
28
Legal Status
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Who owns the remittance funds?

A bank can only use the remittances as collateral
for a financing if it actually has ownership rights
in the remittances.
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The sender? The sender is the one who owns
the funds at the beginning and wants to make
payment to an indicated beneficiary.
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The senders bank? The senders bank
receives the funds from the sender along with the
senders request to cause a payment to be made
to the indicated beneficiary.
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The beneficiarys bank? The beneficiarys
bank receives the funds from the senders bank
along with the senders banks request (a
Payment Order) to cause payment to be made
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The beneficiarys bank? The beneficiarys
bank receives the funds from the senders bank
along with the senders banks request (a
Payment Order) to cause payment to be made
The beneficiary? The beneficiary receives the
funds at the end of the payment chain.
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ANSWER IN ALMOST ALL JURISDICTIONS:
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ANSWER IN ALMOST ALL JURISDICTIONS:
They ALL own the funds at

different times in the payment
chain.
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Senders Beneficiarys
Sender
36
Legal Status: First Contract

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Senders
Bank
Sender
US$/
othe
r
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Similar to a Deposit
Payments by a sender to the senders bank are
similar to deposits made into a deposit account
that is, the sender transfers ownership of those
funds to its bank. In some cases, the sender
doesnt even transfer ownership of funds but
rather asks its bank to reduce the credits in the
senders bank account.
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Payments by a sender to the sender's bank are
In return, the sender receives the banks promise
that it will cause an equivalent amount to be paid
to the beneficiary identified by the sender.
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Payments by a sender to the sender's bank are
In return, the sender receives the banks promise
that it will cause an equivalent amount to be paid
to the beneficiary identified by the sender.
The difference with a deposit is that the sender
will not be the one later withdrawing these funds
40
again but rather the beneficiary ultimately
will
receive an equivalent amount.

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Senders
Bank
Sender
US$/
othe
r
41
Legal Status: Second Contract

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Local
Bank
Senders
Bank
Sender
US$/
othe
r
Paymen
t Order
(SWIFT)
US$/oth
er
42

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Similar to the First Contract

Just as with the first contract, payments by a
senders bank to the beneficiarys bank involve
the transfer of ownership of those funds to the
beneficiarys bank. In return, the senders bank
receives the beneficiarys banks promise that it
will cause an equivalent amount to be paid to the
beneficiary identified to it by the senders bank.
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Local
Bank
Senders
Bank
Sender
US$/
othe
r
Payme
nt
Order
(SWIFT
)
US$/ot
her
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Legal Status: Third Contract

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Local
Bank
Senders
Bank
Sender
US$/
othe
r
Payme
nt
Order
(SWIFT
)
US$/ot
her
Beneficiary
Local
Currenc
y or
US$/oth
er
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In this last link in the payment chain, the

beneficiary is paid an amount equal to what the
sender initially asked its bank to cause to be paid
(less any applicable fees).
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It is important to note that:
- the funds received by the beneficiary are not
the same funds delivered by the sender to its
bank; in fact, frequently they are a different
currency (e.g., the sender delivered US Dollars to
its bank whereas the beneficiarys bank delivers
Thai Baht to the beneficiary),
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It is important to note that:
- the funds received by the beneficiary are not
the same funds delivered by the sender to its
bank; in fact, frequently they are a different
currency (e.g., the sender delivered US Dollars to
its bank whereas the beneficiarys bank delivers
Thai Baht to the beneficiary), and
- the payment itself might not involve the
delivery of ownership of physical cash to the

beneficiary but rather payment might be made
through a credit to the beneficiarys bank
account, which thus means that what
48 the
beneficiary receives is a deposit claim (i.e., an
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It is very important to have confirmed in

the applicable jurisdiction that there is no
local law that would contradict this
standard analysis that is, that the right
to receive these payments from a foreign
bank ARE OWNED BY THE RECEIVING
BANK AND NOT THE NAMED
BENEFICIARY.
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There are two definitions that are

typically used in describing the rights
that a bank uses as collateral for a
remittance-based financing:
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Payment Order
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Payment Order
Diversified Payment Rights (DPR)
52
Legal Definition: Payment Orders

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An electronic or other message to instruct
or request the local bank to make a

payment to any beneficiary other than the
local bank
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local bank, which message may be:
An MT102+, MT103+ or any other MT100category message under the SWIFT message
system (or, unless specifically excluded, an
MT202 payment order received by the local
bank for payment to another financial
institution),
54

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institution), or
Any other type of message, including via
Fedwire, CHIPS, telex or the internet, that
may be utilized to send such an instruction.
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institution), or
Any other type of message, including via
Fedwire, CHIPS, telex or the internet, that
may be utilized to send such an instruction.
Payment Orders would also include similar
instructions received by the local banks

foreign branches from customers of such
branches (e.g., local deposit customers
56
who request that their accounts with the
Legal Definition: DPRs

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All rights (but none of the obligations) of the

local bank in [U.S. Dollar/Euro]-denominated
Payment Orders received (or to be received)
by the local bank (including its right to
receive and/or retain for itself all payments
made in connection with such Payment
Orders).
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Diversified Payment Rights do NOT include:
58

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Payments to the local bank (e.g., repayments of

loans, treasury operations and fees), including
those that come to a correspondent of the local
bank for the benefit of the local bank via a SWIFT
MT202 COV payment order (except to the extent
to effect payment for a payment order received
by the local bank)
59

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by the local bank)
Credit card payments and check collections
(which are not payment orders instructing the
local bank to make a payment to a third-party
beneficiary and generally are SWIFT MT202s for
the benefit of the local bank)
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by the local bank)
Collections on cash-against-documents
transactions (which are advised under a SWIFT
MT400) and on letter of credit-backed export
MT756)
61

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by the local bank)
Collections on cash-against-documents
MT400) and on letter of credit-backed export
MT756)
Any or all of the above COULD be included;
however, certain of these are less

62 desirable to
investors and others (such as credit cards) may

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The collateral used for these transactions is

thus:
The DPRS (i.e., all rights (but none of the
obligations) of the local bank in [U.S.
Dollar/Euro]-denominated Payment Orders
received (or to be received) by the local
bank (including its right to receive and/or
retain for itself all payments made in
connection with such Payment Orders)),
and
Certain foreign nostro accounts to which
collections on the DPRs are deposited will
also be assigned to the buyer of the DPRS
(the SPV).
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Investors
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Why are these payment flows of interest

to investors?
Assets are in hard currencies such as
USD, Yen and euro; the assets match the
liabilities, reducing FX risk
Greater ability to invest on the strength of
the individual originators
Minimize country risk
Especially helpful for
transferability/convertibility risk
Lower reliance on local court system
Greater protection against credit risk of the
originator, particularly in true sale

structures
65
Issuances can be tailored to investor
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Why are these payment flows of interest

to investors?
Assets are in hard currencies such as
USD, Yen and euro; the assets match the
liabilities, reducing FX risk
Greater ability to invest on the strength of
the individual originators
Lower reliance on local court system
Greater protection against credit risk of the
originator, particularly in true sale

structures
66
Issuances can be tailored to investor
Investors
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Lending to small- and medium-sized

enterprises (SMEs)
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Supporting energy efficiency projects
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Lending to women in business
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Why did the market develop?

Structured Finance in general
Greater protection against credit risk of
the originator, particularly in true sale

structures
Method to mobilize private funds for
longer tenor, lower-cost financings

For originators, attractive pricing
compared to unsecured bonds and ability

to reach out to more investors; for
investors, attractive collateral
Typically rated debt
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Why did the market develop?

Future Flow Transactions
Grants investors access to systemically
important entities in countries they may

find challenging
For banks in Turkey, Peru and Brazil, this used
to be the main access for long-term crossborder funding

Ratings may exceed sovereign ceiling due
to the use of hard currency payments

from foreign obligors
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Types of Investors
Insurance companies
Pension funds
Asset managers
Banks
Developmental organizations
Are these investors different from a

countrys traditional investors?
Diversity of investors due to structured
nature
Greater access to investors where higher
rating achieved
72
Investors looking for longer tenors
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Need for Ratings

In most cases investors prefer rated
transactions
They may have internal rating requirements
to fulfill or need ratings for capital allocation

purposes
Nonetheless, a non-investment grade
rating would often not be beneficial

Capital charges for investors may be
excessively punitive
In which case a non-rated alternative may
be more attractive
Ratings can be used to benchmark
returns (i.e., as ratings improve,

the
73
returns can be reduced)
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Rating Methodology Overview

While the three main rating agencies
Fitch, Moodys, S&P have different

methodologies, there are similarities
across all three:
The rating of the originator forms the
foundation, as well as the product, the

obligors and the significance of the
business and likelihood of its continuation
in adverse conditions
Consideration is given to the legal
strength of the home jurisdiction of the

originator
Historical cashflow is examined, including
performance during times of

74stress
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Rating Possibilities
In countries such as Turkey, the rating
uplift potential is significant. Examples

are provided below using ratings by Fitch:
Originator
Bank
Rating
Transaction
Rating
Upli
ft
Akbank
BBB-
A-
Finansbank
BBB-
BBB+
Garanti
Bank
BBB-
A-
Isbank
BBB-
A-
Vakifbank
BBB-
A-
Yapi Kredi
BBB
A-
Potential rating uplift to investment
grade?
75
BREAK
76
Typical Structure
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Typical Structure
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What types of structures are possible?

Structured finance can be divided into two primary
forms securitization (e.g., for auto loans) and nonsecuritization (e.g., covered bonds, future flows)
What is securitization?
Technically speaking, the term securitization
simply means the conversion of a financial asset
into a security. More commonly, however, the term
is used to mean the transfer (generally as a true
sale) of existing receivables or other payment
rights to a single purpose vehicle (SPV). The SPV
then incurs debt secured by the purchased assets.
A traditional securitization involves the transfer of
credit risk to the investors. For example, if the
borrower of an auto loan fails to make payment,
78
then the investors in an auto loan securitization
bear
that risk.
Typical Structure
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
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Rating Agencies
(evaluate credit risk/deal structure, assess third parties, interact with
investors and issue ratings)
Insures
particul
ar
tranche
s
SPV
Assets
Liabilitie
s
Collects and
makes
payments
Monitors
complian
ce
Originato
r/Service
r
Trustee
Fund
s
Tranch
es
79
Financial
Guarant
or
Investors
Typical Structure
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
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Remittance deals are not, however,

traditional securitizations
Financings for future remittances are not
traditional securitizations as:
The investors are relying upon the quality of the
originator instead of the quality of the assets as
the originator needs to stay in business in order
to continue to generate future assets.
The investors are not just taking the credit risk of
the assets but rather have full (or almost full)
recourse to the originator.
As a result, the debt is often accounted for on
balance sheet.
No third party can easily replace the originator to
handle the assets, such as paying beneficiaries or

collecting from obligors (i.e., the remittance
80
senders).
Typical Structure
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
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Rating Agencies
(evaluate credit risk/deal structure, assess third parties, interact with
investors and issue ratings)
Insures
particul
ar
tranche
s
SPV
Assets
Liabilitie
s
Collects and
makes
payments
Monitors
complian
ce
Originato
r/Service
r
Trustee
Fund
s
Tranch
es
81
Financial
Guarant
or
Investors
Typical Structure
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
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Exactly the same!

There is a true sale of the future flow of
remittances to an SPV.
Bankruptcy Remote: Sold receivables are
not owned by their originator and would not
be included in the originators bankruptcy
estate (i.e., not subject to claims of any other
creditors).
The SPV uses its assets as collateral to raise
funding.
The collections on the assets are used to pay
investors.
A trustee or security agent for the investors
controls the collections and the bank
accounts into which they are paid.
82
Typical Structure
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
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So what is the difference?
83
Typical Structure
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
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Government
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Recourse: In securitizations, the liability of the
originator for losses by investors is somewhat

more limited than in straight debt issuances;
however, as with covered bonds, this is not
always the case for future flow transactions.
Traditionally the investors have full (or almost
full) recourse to the originator.
84
Typical Structure
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
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Government
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Originator Survivability: Investors and rating
agencies are more focused on the credit quality

of the originator since it is the originators ability
to withstand a bankruptcy event that ensures the
continued generation of future receivables.
Investors are investing in business continuity
85
Typical Structure
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Originator Survivability: Investors and rating
agencies are more focused on the credit quality

of the originator since it is the originators ability
to withstand a bankruptcy event that ensures the
continued generation of future receivables.
Investors are investing in business continuity
Offshore SPV: As the assets come from
offshore, the SPV is traditionally offshore

in order
86
to minimize sovereign risk and enable investors
Typical Structure: Program?

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
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Government
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Program vs. Single Transaction

Leveraging Receivables
A program allows multiple sets of creditors to share

in a single asset pool, which is sometimes required
if assets cannot be easily segregated (e.g., financial
flows)
What leverage limitations to apply?
Efficiency
A program is more costly and time-consuming

upfront but will save significant money and time
for future series
A program avoids need to approach companys
obligors for each series
A program can facilitate compliance with
negative pledge/asset sale limitations as transfer
(as opposed to funding) occurs only once
87

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Program vs. Single Transaction

Complexity
A program is much more complex and thus

potentially more confusing for company, courts
and regulators
For smaller issuers, the keep it simple
approach may be preferable; particularly as
much of the flexibility included in programs can
require significant legal diligence to make sure
future potential series work
A single transaction facilitates using different
terms in later deals
Amendments/Waivers
In a program, the creditors in one series can be

outvoted by majority
88

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
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Government
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Master Structure provides Flexibility

Different series can have different tenors
and amortization schedules

Series can be in different currencies (e.g.,
U.S. Dollars, Yen, Euros, etc.), though

rating agencies, enhancers or others may
restrict and/or require hedging
Series can bear either a fixed or floating
interest rate
Series can be enhanced (e.g., supported
by a financial guarantee) or unenhanced

(e.g., not supported by a guaranty)
Series can be securities offered to
89 publiclyinvestors in several ways (e.g.,
registered or traditional private placement)
Typical Structure
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
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Government
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REMITTANCE (DPR)
TRANSACTION
90
Typical Structure: DPR Example

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Sale of DPRs
In a Diversified Payment Rights (or DPRs)
program, a special purpose vehicle (i.e.,

the SPV) is formed to incur debt secured by
the flow of funds arising from the DPRs
A DPR transaction contemplates a sale of
the Banks right, title and interest in and

under (but none of its obligations under)
the Payment Orders and certain bank
accounts to the SPV, the purchase of which
the SPV finances by incurring debt that is
secured by the SPVs rights in the DPRs,
such bank accounts and the proceeds
thereof
91

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
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Government
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The Bank retains all of its obligations to
make applicable payments to the ultimate

beneficiary of a Payment Order
The sale will be governed by local law (i.e.,
the law of the Banks home jurisdiction)

Using the law of another jurisdiction is
not a viable option if Dollar-denominated
DPRs are included since, if the sale is
challenged by a third-party, a U.S. court
will likely disregard the parties choice of
law and will apply the law that it views to
be most applicable (which likely would
be the law of the Bank or U.S. law)
92

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
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Government
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Placement of Debt
The SPV may either issue securities or
borrow loans in order to fund its purchase

payments to the Bank
If securities, notes may be offered in
several ways:
Public offering
Private placement to investors, including
144A
Private placement to a conduit
If a loan, loans may be made in typical
ways:
Syndicated loans
Bilateral loans
93

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
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Legal/Transaction Issues
True Sale
Government and other Approvals
Conflicts
Others
Account Agreements
Credit Enhancers
Rating Agencies
Amortization/Defaults
94

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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True Sale
A transfer of financial assets that, for the
purposes of the insolvency laws of the

applicable jurisdiction, constitutes a sale of
such assets as distinguished from a financing
of the seller thereof secured by such assets
Removes the financial assets from the
bankruptcy estate of the seller

Necessary to ensure that, upon the insolvency
of the Bank, the bankruptcy

trustee/administrator would not have any claim
to the DPRs
Somewhat different when applied to a
transaction by a bank as opposed to a

receivables transaction by an exporter
or other
95
corporate entity as insolvency laws for banks

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Approvals
The Bank must obtain any necessary
governmental and other approvals for the

securitization of the DPRs (e.g., any
Central Bank and shareholder approvals)
In most jurisdictions, including Russia and Turkey,
no governmental approvals have been needed;
however, this has not been the case in South
Africa and Vietnam
While only board approvals are required in most
jurisdictions, in some ex-CIS countries (e.g.,
Russia, Azerbaijan) shareholder approval has
been considered necessary due to the size of the
assets involved
Local external and in-house counsel opine

96
that all necessary approvals have been

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
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Government
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Conflicts
The Bank must investigate whether the
DPR transaction would violate any existing

agreement of the Bank, such as negative
pledge or non-disposal covenants in
outstanding eurobond or loan facilities.
Particularly for covenants in eurobonds,
this can require a detailed analysis.
This is traditionally a more clear analysis for true
sale structures but pledge structures (such as in
Russia) have traditionally required a number of
waivers of negative pledge clauses. While a
small few number of law firms are aware of how
to draft a negative pledge to work for a future
flow transaction, the vast majority do not (and
form loan and other agreements generally do
not do so satisfactorily)
97

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
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DPRs: Crisis Experience

Future flow transactions in emerging markets,
especially DPR transactions, continued to

perform strongly through global crisis in credit
markets starting in 2008
Rating Agencies continued to rate DPRs highly
during crisis based upon several indicators
including:
DSCR ratio (overcollateralization)
Strong trapping mechanism
Kazakh Case Studies
KKB
Rating soft early amortization
BTA
Rating soft early am and various other
events, including nationalization
98
Alliance
Typical Structure: Asian Context

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
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Is the typical structure a good fit in the

Asian context?
For institutions with sufficient flows and the
ability to reach investment grade, the typical

structure is ideal
However, in some cases:
Remittance volumes may be too low to support

a standard structure economically or
sustainably; or the remittances may not be
getting channeled through formal means and
thus cannot be harnessed optimally
Setting up a transaction incurs upfront costs,

which needs to be justified by a reasonable
issuance size
The size of the debt supported by the structure

99 amount
should not be an overwhelming
compared to the total liabilities of the originating
Typical Structure: Asian Context

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
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Government
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Is the typical structure a good fit in the

Asian context?
In some cases it is possible, however, in others:
The legal analysis on whether the traditional

structure would work may not be not clear
Is the country legal framework open to

securitization?
Can it contemplate the sale of future assets?
How robust is the enforceability of creditors

rights?
How much government involvement is required

at each step of setting up the transaction?
How would the future flow creditors rank

compared to the other creditors of the
originating entity?
100
The rating uplift may not hit investment
grade
Alternatives
101
Alternatives
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
Transactions
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Is a typical structure more than is

needed?
Companies and local courts might struggle with
more complex documents

Though some do, local laws usually do not
explicitly contemplate true sales of future

assets
Sale/pledge of future assets?
Is pledge more familiar and thus safer?
How taxed (e.g., taxes on sales but not

financings)?
Are tax rules easier for a pledge (e.g., in Russia)?
How accounted for?

Can deal size support transaction costs?
102
Alternatives: Secured Loan

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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An alternative is a direct loan secured
by the future flow assets

Advantages include simplicity, lower
transaction costs and clearer
application of tax-preferred status of
the ADB and other DFIs
Disadvantages include greater risk of
loss of collateral to preferred creditors,
a stay of the exercise of remedies,
negative pledges and potential redenomination
103

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
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True Sale vs. Secured Loan

Bankruptcy
True sale usually better at surviving

bankruptcy
Validity of sale has been confirmed in

Kazakhstan, Turkey, Brazil and all other DPR
jurisdictions other than Russia (in which a
pledge is used, though primarily driven by tax
reasons)
Most civil law jurisdictions require simply: (a) an

agreement of sale, (b) sufficient identification
of the sold assets and (c) consideration
Some jurisdictions require specific identification
and potentially registration of each sold asset,
making a sale of future assets challenging
Security for secured loan may be subject to

104
super-priority claims (e.g., taxes, wages or

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
Transactions
Related Topics
True Sale vs. Secured Loan

Negative pledge or asset disposal restrictions?
Quantitative limits in covenants may guide

structure (e.g., use of a partial sale)
Level of recourse
Sometimes limited in true sale transactions,

but this is less true for future flow
financings than for asset-backed
securitizations
Enforcement
True sale facilitates exercise of remedies

against assets solely offshore whereas
remedies for a loan:
may be stayed by bankruptcy proceedings,

105
including accrual of interest
Alternatives: Structuring Decisions

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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What considerations are there in

structuring a deal?
Does the local law recognize the elements of the
deal?
Banks ownership of assets recognized?
true sale recognized?
Regulatory approvals required?
Tax considerations?
Enforcement considerations?
Originators ability to provide detailed historical
data?
Originators existing contractual limitations?
Negative pledges/asset disposal clauses?

106
Alternatives: Investor Considerations

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Investor perceptions of different

structures
True sale vs pledge structures
Legal position typically clearer in true sale vs

pledge
Uncertainty in enforceability may make pledge
structures more expensive
Rated vs unrated
Issuances achieving investment grade ratings

will price better than unrated issuances
Ratings provide the opportunity to scale
pricing according to changes in the rating
Listing
107
Not typically a requirement, unless
required
for domestic structures
Alternatives: Investor Considerations

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Investor perceptions of different

structures
SPV issuances in the form of bonds vs loans
Bond issuances may be more easily traded;

loan structures may be more intended for
take-and-hold
Bond issuances have mark-to-market
requirements while loans do not
Investing entities might have different
departments capable of investing in different
products with different intentions, i.e. one in
bonds vs another loans
Withholding taxes might be preferable for loan
structures vs bonds
However, in some jurisdictions108
the
securitization framework may only be able to
Alternatives: Asian Context

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
Transactions
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What alternative structures might fit

better in the Asian context?
Secured rather than true sale
Loan over bond
Single currency issuances
Rated transactions if investment grade
achievable
Supported by a guarantee from a DFI
Focus on key remittances, but include wider
range of flows to support volumes if necessary

3-5 year tenors, with a view to stretch to longer
tenors once established or for particular investors

109
Role of Government
110
Role of Government
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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What can governments due to facilitate these

transactions?
The single most common challenge in creating

these transactions is trying to fit it into the local
legal environment, which usually will not have laws
and regulations in place that have anticipated such
a transaction.
Appropriate legal, tax and regulatory framework
Appropriate accounting treatment
Provide education for regulators and local banks
Give investors confidence in reliability and
efficiency of local court system

Demonstrate confidence in such structures by
securitizing assets owned by governments that

use the concepts and mechanisms
employed for
111
traditional remittance structures (e.g., airport fly-
Role of Government
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
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Appropriate legal, tax and regulatory

framework
REMITTANCE-SPECIFIC
Does the local law recognize a banks ownership
of (and ability to transfer) the payment rights for

remittances?
Does the local law permit a current sale of future
assets, including to offshore purchasers?

Many securitization laws only anticipate purely domestic
sales and sales of existing assets.
What mechanics are required for a sale?

Notices required to obligors? Consents from obligors?
Required specificity of identification of sold assets?
Are regulatory approvals required for a
transaction?
112
Are banks permitted to sell/pledge assets,
Role of Government
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Appropriate legal, tax and regulatory

framework
TAX
Does the local tax law permit such sales to an
SPV without the seller incurring transfer, income,

VAT or other taxes?
Does the local tax law impose any stamp taxes on
any of the contracts?

Does the local tax law minimize or eliminate
withholding taxes for payments to offshore

investors?
113
Role of Government
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Appropriate accounting treatment

How should deal be reflected on unconsolidated
balance sheet?
REMEMBER: There are no/few current receivables
Does accounting treatment differ from tax
treatment?
114
Role of Government
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Provide education for regulators and local

banks
Seminars on details of these transactions
Information on benefits the transactions provide
to the local economy

Demonstrate support and commitment by issuing
clear statements on matters that are unresolved

and simplifying the approval processes
115
Role of Government
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
Transactions
Related Topics
Confidence in reliability and efficiency of local

court system
Are judges well-educated and independent from
the government?
Do local courts honor the choice of foreign laws to
govern a contract?
Do local courts honor foreign court judgments?
Can foreign investors enforce their rights in local
courts or is a local enforcement agent required?

Are foreign parties treated by the courts the same
as local parties?
Can foreign language documents be enforced in a
local court without need for translation?

Do local courts defer to higher courts judgment
or can each judge reach an independent

116
decision?
Similar Transactions
117
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
Transactions
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Similar transactions can only benefit

a country
True future flow transactions
Airline ticket receivables

Utilities receivables
Committed future flow transactions
Off-take contracts for oil or other commodities

Concession agreement receivables
Hybrid future flow (i.e., limited number of
purchasers but no off-take contract)

Commodities
Manufactured exports
Airport landing right receivables
118
Frequent flyer miles receivables
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
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True Future Flow Example: Airline Ticket

Receivable Transaction
An airline uses the receivables of certain
routes:
The routes are constant revenue generators,
stable and are deemed strategically important
Sales are denominated in Dollars or other hard
currencies
There are strong trade, commercial and/or
cultural relationships between the points of the
routes and the airline enjoys a dominant market
share between the destinations
Sales are routed through third party collection
agencies
The yield of the routes is strong
119
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Committed Future Flow Example:

Concession or Royalty Agreement
Transaction
An entity has the right to receive royalty or
concession payments from a third party (e.g., a

hydropower exporter or a special economic
zone operator)
Ideally the royalty or concession payments are
independent of any performance obligations, or
the concession payments are stable in nature
currencies
There are not many alternatives for the obligor to
source in place of the product or service
The obligor is better rated than the originator
120
The contract tenor is at least as long as the debt
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Hybrid Future Flow: Airport Landing Fee

Transaction
An airport operator has the right to charge fees
to airlines and passengers for landing rights

and aeronautical services provided at the
airports that it operates
While there may not be any fixed contracts
between the operator and the airlines, there is a
high likelihood that the airlines that currently fly
to such airports will continue to operate flights to
those airports
currencies
The airport operator enjoys a significant market
share and there are not many viable alternative
airports that can be used
121
Transaction Structures
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Governmen
t
Similar
Transaction
s
Related Topics
The basic transaction structure is the

same throughout
(1) The originator sells its

rights to the future
receivables to the SPV.
(2) The SPV purchases the

receivables by
obtaining funding from
investors.
(3) Collections from the
receivables are used
first to service the
SPVs debt. Excess
collections are repaid
by the SPV to the
originator via a
subordinated note as
part of the
consideration for the
purchase of the
receivables.
SPV
Sale of receivables
US$
US$
SPVs Jurisdiction
Originator
2
Debt issued
Offered
Notes
Subordinated
Note
Multi-Country
Exporters
Country
122
Investors
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Likewise for the cash flow
Obligor
Originator Home
Jurisdiction
Obligor
y
Originator
US
$
SPV Collection
Account
Any jurisdiction
US$
Excess
Collectio
ns
US$
Investors
The SPV
US
$
SPVs Jurisdiction
123
International
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Common risks
Generation
Will originating entity stay in business?

Will goods or services continue to be competitive?
Can the good or service be diverted or be
replaced?
Will volumes and prices remain stable?
Collection
Are obligors / customers creditworthy? Might

customers change in future?
How easy is it to enforce on collections
Diversion
Is nationalization or expropriation a risk?

124 the
Might governments restrict or change
business?
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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What are the differences?

Certainty of future cashflows
Contractually highest for the committed future

flows, provided performance risk of originator is
protected against
Lowest for true future flow
Legal analysis required for structure
Likely to be most straightforward for committed

future flows
More complex for true future flows
Debt service coverage ratios expected by
investors
Lower levels required for committed future flows

Highest expected for true future flows
125
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Similar transactions can only benefit a

country by:
Establishing the framework for how to deal with
sales of future assets

Familiarizing transaction counterparties in the
country with the practices of securitization

Developing originator interest
Developing investors awareness and familiarity
Future flow transactions need not be crossborder in nature, local currency assets can
also be used for domestic transactions.
126
Related Topics
127
Operational Requirements for the Bank

Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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Computer Systems/Monitoring
Historical Data
Accounting
128
Computer Systems/Monitoring
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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The Bank must have the technological
capability to produce the periodic servicer

reports required under the Servicing
Agreement
The Bank must have systems with
sufficient redundancy (back-up) to satisfy

credit enhancers, rating agencies and
investors
Monitoring of money-laundering and
related laws
129
Historical Data
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
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To market and rate DPR-backed debt, the
Bank will typically need three years (ideally

five) of detailed historical information on
its Payment Order business on a quarterly
and monthly basis
Stability/diversity of the Banks flows and
quality of historical information

Breakdown of historical flows by customer,
industry, identity, purpose, remitting bank,

etc.
130
Accounting Issues
Overview
Asset Classes
Legal Status
Investors
Typical
Structure
Alternatives
Role of
Government
Similar
Transactions
Related Topics
The SPV might be consolidated with the
Bank (even though it is not a subsidiary)

due to control/auto-pilot accounting rules
both under local accounting rules and (in
particular) under IFRS (SIC 12). The Bank
should discuss this with its auditors.
The debt of the SPV in closed deals has
been noted in the unconsolidated balance

sheet of the originator either: (a) as a longterm debt or (b) as a non-debt liability,
such as a prepayment for sold items or an
obligation to pay Payment Orders to
beneficiaries.
The Banks local accountants will need to
be involved in the structuring of the

transaction to determine the appropriate
131
accounting under local GAAP.
Thank You!
Q&A
132
Wan Ning Lie

Director, Capital Market
Solutions
Standard Chartered Bank
Jim Patti
Partner
Mayer Brown LLP
133

Leveraging Remittance Flows: An Introduction To Future Flow Transactions

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LEVERAGING REMITTANCE FLOWS:

An Introduction to Future Flow

What is our goal for today?

What is our goal for today?

remittances to finance a nations development,

What is our goal for today?

remittances to finance a nations development,

What is our goal for today?

remittances to finance a nations development,

What is our goal for today?

remittances to finance a nations development,

governments can play in facilitating these

Why is this topic of interest?

Because remittance-backed financings can:

Why is this topic of interest?

Because remittance-backed financings can:

funding (five or more years),

Why is this topic of interest?

Because remittance-backed financings can:

funding (five or more years),

Why is this topic of interest?

Because remittance-backed financings can:

funding (five or more years),

including potential for AAA investors if a

Why is this topic of interest?

Because remittance-backed financings can:

funding (five or more years),

including potential for AAA investors if a

framework and experience for international

Why is this topic of interest?

Because remittance-backed financings can:

funding (five or more years),

including potential for AAA investors if a

framework and experience for international

customers (e.g., the unbanked),

Why is this topic of interest?

Because remittance-backed financings can:

funding (five or more years),

including potential for AAA investors if a

framework and experience for international

customers (e.g., the unbanked),

Why is this topic of interest?

Because remittance-backed financings can:

funding (five or more years),

including potential for AAA investors if a

framework and experience for international

customers (e.g., the unbanked),

Diversified Payment Rights (DPRs)

These DPRs act as the collateral that is used in

Diversified Payment Rights (DPRs)

These DPRs act as the collateral that is used in

Asset Classes: DPRs

Asset Classes: DPRs

Asset Classes: DPRs

Asset Classes: DPRs

Society for Worldwide Interbank

and maintained by the member banks.

Basically a sophisticated and secure

global e-mail system.

communications per day via SWIFT.

Asset Classes: DPRs

Asset Classes: DPRs

Who owns the remittance funds?