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Ranjit (Querist)

15 November 2009 plse help me out by solving this case study.

Case Study
Maruti Auto Finance Ltd.
The company is seeking refinance through securitisation of its 10 different auto lease deals.
Lease deal No. Original Principal Amount (Rs.) Type Implicit Interest Rate Maturity
( Months) Expired life
(Month)
2007/1 1700000 EMI 15% 70 20
2007/2 2500000 EMI 15.50% 70 20
2007/3 1250000 EMI 14.75% 70 20
2007/4 1280000 EMI 14.85% 70 20
2007/5 1750000 EMI 15.10% 70 20
2008/1 2212000 EMI 14.90% 60 10
2008/2 2000000 EMI 13.90% 60 10
2008/3 2500000 EMI 14.20% 60 10
2008/4 2000000 EMI 14.30% 60 10
2008/5 2000000 EMI 14.10% 60 10

A merchant banker has given the following proposals:
1. Issue a single pool with LTV 75% at 12.0 % p.a. pass through rate and service charge of 1% p.a. inclusive credit rating, credit guarantee.
2. Issue PO and IO series separately. The PO series is expected to have LTV 85% with pass through rate of 11.75% p.a and IO series is expected to have LTV of 70% with pass through rate of 12.75% p.a. Service charge will be same as mentioned in proposal (1).
3. A third alternative is to issue three series –
i. Series 1 comprising of 50% of PO and 5% of IO at pass through rate of11.9% p.a;
ii. Series 2 comprising of 30% PO and 20% IO at pass through rate of 12.15% p.a.
iii. Series 3 comprising of 5% PO and 45% IO at pass through rate of 12.5% p.a. Service charge will be same as mentioned in proposal (1).

Prepare report showing what proposal the company should accept. The company is pondering over the reinvestment rate with 2% spread. What should be the acceptable level of reinvestment rate. Does it match with the existing lease rate? The company expects a rise in the lending rate in the range of 20 – 30 bps.