Description
This is a presentation about the case study analysis Fremont Financial corporation.
FREMONT FINANCIAL CORPORATION
Case Study Finance --Group 4, SIBM,
Company Overview
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Medium sized commercial finance company (total revenues USD 31.4 mn, at year end 1992) Concentrated on secured asset based lending to middle market businesses. Offered short term revolving credit lines ranging from USD 1 mn – USD 5 mn, on an advance rate basis, on face value of receivables or inventories. 75% of Fremont’s 120 employees were involved in monitoring degree of securitization of the loan, collateral verification and daily loan activity of collections. Required to extend existing lines of credit or consider suitable alternatives of financing loan portfolio.
Commercial banking vs commercial financing
Commercial Banking Institutions
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Commercial Financing Companies
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Accept deposits Primary source of funding is customer deposits Rely on convenants and seniority provisions to insure borrower performance
Do not accept deposits Primary source of funding is CP, commercial bank lines of credit, etc Impose different mechanisms to guarantee loan performance – like liquidation of collateral
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• Asset based lenders focus on valuation of a business’ collateral • Receivables & inventories are the most prevalent type of collateral used • Asset based lenders are considered “pawn brokers” of commercial lending • Effective monitoring extremely important due to the high risk nature of business.
Financing alternatives
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In 1992, Fremont’s loan portfolio had grown 49% Y-o-Y to USD 282 mn Only USD 10 mn available out of USD 160 mn in its current bank line of credit from a 8 bank syndicate. Continued growth requires extension of credit line to USD 300 mn Options available are as under:
Commercial Bank Lines of Credit
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Commercial Paper
Asset Securitization
Commercial Bank Lines of Credit
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As of Nov 1992, main continuing source of capital for Fremont had been revolving unsecured commercial bank lines of credit. Interest paid on this line was either:
• Banks’ Prime Lending Rate • Domestic CD rate +125 bps • Eurodollar deposit rate + 125 bps
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Fremont also had to pay 50 bps for unused commitment. Weighted average interest rate for the year 1992 was 4.75% Approval of each bank in the syndicate is required to extend line of credit.
Commercial Paper
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Short term debt with maturities ranging from 1 to 270 days Means of raising capital directly from public. “Credit Wrapping” feature based on the riskiness of the issuer – highest rating being A1/P1 (S&P) Conduits – SPVs created by one or more banks originating and distributing CP of multiple companies. CapMAC, a AAA monoline insurer would provide the CP conduit a deficiency guarantee, in the form of a surety bond, covering all losses. Initially the purchase limit by the conduit would be USD 225 mn (Yield on it is CP rate+127bps approx = • Main issue is the inability to match the timing of the CP issue with Fremont’s 3.867%)
cash needs. • CP program promised a high effective advance rate on Fremont’s loan portfolio as well as the ability to accommodate future growth.
CP structure via Conduit
Asset Securitization
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Would allow Fremont to fund its loans quickly and independently In case Fremont over-collateralized the issue by 19%, a AAA rating would enable the issue to earn LIBOR+90 bps, according to Merill Lynch (4.028% as per data) Securitization would act as a continual source of funds assuming the investing community had an appetite for the certificates Revolving credit lines had varying balances which would create difficulty in the securitization structure
• Main issue is execution of a financing this complicated.
• Management at Fremont is wary about the investor demand for the structured offering. • It would take time and effort to obtain a favorable rating on the offering.
Securitization structure
THANK YOU
doc_577283396.pptx
This is a presentation about the case study analysis Fremont Financial corporation.
FREMONT FINANCIAL CORPORATION
Case Study Finance --Group 4, SIBM,
Company Overview
?
?
?
?
?
Medium sized commercial finance company (total revenues USD 31.4 mn, at year end 1992) Concentrated on secured asset based lending to middle market businesses. Offered short term revolving credit lines ranging from USD 1 mn – USD 5 mn, on an advance rate basis, on face value of receivables or inventories. 75% of Fremont’s 120 employees were involved in monitoring degree of securitization of the loan, collateral verification and daily loan activity of collections. Required to extend existing lines of credit or consider suitable alternatives of financing loan portfolio.
Commercial banking vs commercial financing
Commercial Banking Institutions
? ?
Commercial Financing Companies
? ?
Accept deposits Primary source of funding is customer deposits Rely on convenants and seniority provisions to insure borrower performance
Do not accept deposits Primary source of funding is CP, commercial bank lines of credit, etc Impose different mechanisms to guarantee loan performance – like liquidation of collateral
?
?
• Asset based lenders focus on valuation of a business’ collateral • Receivables & inventories are the most prevalent type of collateral used • Asset based lenders are considered “pawn brokers” of commercial lending • Effective monitoring extremely important due to the high risk nature of business.
Financing alternatives
?
In 1992, Fremont’s loan portfolio had grown 49% Y-o-Y to USD 282 mn Only USD 10 mn available out of USD 160 mn in its current bank line of credit from a 8 bank syndicate. Continued growth requires extension of credit line to USD 300 mn Options available are as under:
Commercial Bank Lines of Credit
?
?
?
Commercial Paper
Asset Securitization
Commercial Bank Lines of Credit
?
?
As of Nov 1992, main continuing source of capital for Fremont had been revolving unsecured commercial bank lines of credit. Interest paid on this line was either:
• Banks’ Prime Lending Rate • Domestic CD rate +125 bps • Eurodollar deposit rate + 125 bps
?
?
?
Fremont also had to pay 50 bps for unused commitment. Weighted average interest rate for the year 1992 was 4.75% Approval of each bank in the syndicate is required to extend line of credit.
Commercial Paper
? ? ?
?
?
?
Short term debt with maturities ranging from 1 to 270 days Means of raising capital directly from public. “Credit Wrapping” feature based on the riskiness of the issuer – highest rating being A1/P1 (S&P) Conduits – SPVs created by one or more banks originating and distributing CP of multiple companies. CapMAC, a AAA monoline insurer would provide the CP conduit a deficiency guarantee, in the form of a surety bond, covering all losses. Initially the purchase limit by the conduit would be USD 225 mn (Yield on it is CP rate+127bps approx = • Main issue is the inability to match the timing of the CP issue with Fremont’s 3.867%)
cash needs. • CP program promised a high effective advance rate on Fremont’s loan portfolio as well as the ability to accommodate future growth.
CP structure via Conduit
Asset Securitization
?
?
?
?
Would allow Fremont to fund its loans quickly and independently In case Fremont over-collateralized the issue by 19%, a AAA rating would enable the issue to earn LIBOR+90 bps, according to Merill Lynch (4.028% as per data) Securitization would act as a continual source of funds assuming the investing community had an appetite for the certificates Revolving credit lines had varying balances which would create difficulty in the securitization structure
• Main issue is execution of a financing this complicated.
• Management at Fremont is wary about the investor demand for the structured offering. • It would take time and effort to obtain a favorable rating on the offering.
Securitization structure
THANK YOU
doc_577283396.pptx