Project Securitization: “A Fund Generation Alternative”

By:

Fernando M. SopotPresident & CEO

Global First Financial Partners, Inc.Global First Financial Partners, Inc.P: 1.908.463.9417

E: fms@globalfirstfinancial.net

September, 2014

This “paper” is intended only to individuals to whom the author wants to send, thus circulation of this “paper” is prohibited without an authority from the author. This “paper” is subject to change without prior notice.

I. IntroductionSecuritization is a structured finance process, which involves pooling and repackaging of cash-flow

producing financial assets into securities that are then sold to investors. The name “securitization” is

derived from the fact that the form of financial instruments used to obtain funds from the investors

are securities.

Structured finance” is a broad term used to describe a sector of finance that is created to help

transfer risk using complex legal and corporate entities. The layman’s definition of “securitization” is

that, it is a process of producing a financial instrument. That financial instruments are called bonds. It

can either be municipal bonds or industrial revenue bonds especially those issued by local

governments, and/or project bonds, in the case of securitizing a project.

All assets can be securitized so long as they are associated with cash flow. Hence, the securities, which

are the outcome of securitization processes, are termed asset-backed securities (ABS). From this

perspective, securitization could also be defined as a financial processes leading to an emission of ABS.

Asset-backed securities, are bonds or notes, backed by assets with pre-determined income, or

accounts receivables, originated by providers of credit, not mortgages.

Securitization often utilizes a special purpose vehicle (or SPV) (alternatively known as a special

purpose entity [SPE] or special purpose company [SPC]) in order to reduce the risk of bankruptcy and

thereby obtain lower interest rates from potential lenders or buyers of bonds. A credit derivative is

also generally used to change the credit quality of the underlying portfolio so that it will be acceptable

to the final investors.

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Introductioncontinuation (2)

A Special Purpose Entity (SPE) is a business interest formed solely in order to accomplish some

specific task or tasks. A business may utilize a special purpose entity for accounting purposes, but these

transactions must still adhere to certain regulations. The SPE ends upon accomplishments of its

specific purpose or extended in accordance with the requirements of the Project.

Securitization has evolved from tentative beginnings in the late 1970s to a vital funding source with

an estimated total aggregate outstanding of $8.06 trillion (as of the end of 2005, by the Bond Market

Association) and new issuance of $3.07 trillion in 2005 in the U.S. markets alone.

With the development of financial markets along with the varying objectives of investors, hybrid methodsWith the development of financial markets along with the varying objectives of investors, hybrid methods

of raising funds have emerged and continue to gain acceptance as effective and economical methods of

raising project financing. One such method is ASSET or PROJECT-BACKED SECURITIZATION.

If you look at the website of the Association of Financial Guaranty Insurors (AFGI), you will see that most

of the securitization created in the market today are corporate related and not project related. For

example, securitization of credit card receivables, installment papers, and the like are prevalent. But the

most popular or shall we say (pardon me for saying this) notorious way of raising funds is invoking the

Securities Act of 1933, Reg. D, Rule 506, or commonly known as Private Placement Memorandum (PPM),

where companies are raising funds from accredited investors via the sales of their shares of stocks.

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Introduction continuation (3)

In spite of the Law protecting the investors, you can see so many investors filing cases in a Court of Law to

recover their investments. The investors are at the mercy of the people managing the corporation who are

the beneficiaries of these funds. They rely on the promised dividends or return on investments (ROI).

If the corporation is in default or could not provide the promised returns, for whatever reason or reasons,

they ended up in Court battling the criminal and civil cases filed by the investors. In effect, what we are

saying here, is there is no “check and balance”, as the management and disposition of the funds are left in

the hands of the principals or officers managing the company.

The management of the funds is left in the hands of the people managing the corporation. When the funds areThe management of the funds is left in the hands of the people managing the corporation. When the funds are

diverted, especially for personal use (see Star Ledger, dated April 23, 2006, where one company has raised

$40.0 Million, only to be used part of the money to renovate the company’s CEO’s private house), then

problem starts.

All the names appearing in the PPM, like Auditors, team of management experts, etc., are just mere papers for

purposes of presentation to the Investors, but in reality they are not involved directly or indirectly in the

corporation that floated the PPM in the capital market. It may hurt us to know, but this is the reality.

But of course there are also success stories among corporations raising capital via the use of PPM. We are not

trying to say that all companies that went into PPM have unpleasant stories. But so many of these stories

ended up in Court.

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II. Basic ConceptProject-Backed Securitization is an alternative method of raising funds to finance the implementation

requirements of real estate projects or even infrastructure projects, through the issuance and public or

private offering of asset backed securities. Specifically, this method could be employed for self-liquidating

projects, whose future values, resulting products or financial results, are not only determinable, but also

predictable.

Securitization, or what continental countries calls unitization, may just be the alternative, when projects

do not lend readily to conventional financing methods like, borrowing money from the bank, restrictions

from debt equity ratios, loan syndications or even initial public offerings (IPOs). This may be especially true

in cases where the proponent is:

a) a government agency or a government non-stock corporation that is not prepared for privatization;

b) a private corporation with no credit or investment track record to speak of.

Projects that have good asset values like large tract of land suitable for development, but are bereft of cash to

start development, are good candidates for securitization especially when the projects are divisible into

units, such as subdivisions or housing projects and condo developments, golf, theme parks and resort

developments divisible into proprietary ownership, and even memorial parks.

The required funds are raised through the public or private offering and sale of security instruments against

the strength of the project’s profitability and the value of its assets as disclosed in an Offering Prospectus

registered with the Securities and Exchange Commission (SEC), when required.

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Basic Conceptcontinuation (2)

The funds raised are instituted as a restricted development fund specifically established and solely

dedicated to finance the development and implementation of a specified project.

These Funds will form part of the project’s “Asset Pool” which is held in trust by a reputable financial

institution appointed as Trustee and disbursements are made on the basis of a pre-disclosed Business

Plan, subject to an established accounting and auditing system with a third party intermediary acting as

Pool Auditor.

In effect the “project bonds” or ”notes” are backed up by hard assets, which are created and placed in anIn effect the “project bonds” or ”notes” are backed up by hard assets, which are created and placed in an

“asset pool”. Investors are paid from the Project’s revenues and future values, in the form of fixed

yields, or pre-specified developed units in the Project or agreed participations.

In effect, it is in theory, no different from the widely accepted strategy of pre-selling. While pre-selling is

effective because of the appreciation of anticipated increase in real estate values. Project-backed

securitization is advantageous because it counts not only in the values of the project assets, but also

on its anticipated profits and residual values which accrue to the investors in the event of non-payment

or default of the developer.

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III. Intrinsic Nature

Each asset-backed security represents one (l) unit of participation and

the corresponding pro-rata undivided participation interest in an Asset

Pool, constituted specifically for this purpose. It entitles the holder, within

its specified terms, to all the values, earnings, and rights stipulated therein,

subject to stipulations for its redemption which terminates participation.

An asset-backed security, however, is a holding chargeable directly and

exclusively against the Asset Pool, and does not constitute any right or

evidence of recourse against the Trustee or landowner/proponent.

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IV. Asset Pool Formation

Securitization requires the constitution of a specified pool of assets and values which shall serve as the

backing for the issuance of asset-backed securities. This will require the absolute conveyance and transfer

of these assets and values to a designated financial institution or what we call a Trustee Bank, who shall

act as the project’s Trustee.

This Asset Pool, when constituted, can then be translated into individual security instruments or

Certificates, each of which represents a pro-rata undivided participation interest in the Asset Pool, subject

to the stipulations therein. The terms and feature of these Certificates are specifically designed and issuedto the stipulations therein. The terms and feature of these Certificates are specifically designed and issued

in a public or private offering to institutional or wholesale markets or to high net worth individuals based

on prevailing conditions in the investment market.

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IV, Asset Pool Formationcontinuation (2)

The Asset Pool shall consist largely of the following assets and values:

1. Land and its existing and future Improvements - Consisting of the real estate properties where the Project will be situated, including all existing and future improvements thereon;

2. Development Master Plan - Consisting of all pertinent studies and designs including all engineering and architectural plans, as well as market and feasibility studies, prepared for the project;

3. Sales Proceeds - From the issuance and public offering of the Certificates;

4. Development Incomes - From the sales or lease of the various areas and developed products within the Project;within the Project;

5. Investment Incomes - From the investment of funds not being used by the Project;

6. Value Appreciations - Accrued from the real estate assets of the Project;

7. All Other Future Revenues & Assets - Including real estate properties purchased by the Asset Pool for the Project and all other assets or values which shall accrue to the Project.

Project securitization may just be the answer to many potential projects, like BOT projects,

infrastructure projects, natural resource development, housing projects, condominium development

projects, Golf, Theme Parks and Resort Development Projects, and many more, which in spite of their

inherent profitability, safety and socio-economic relevance, do not have the appropriate active

investors capable of doing the Project with its own credit.9

V. Trusteeship

To isolate and insulate the Asset Pool and its investors, from the landowner or project proponent,

and the residual beneficiaries of the Project, a reputable financial institution is appointed as Trustee

with the primary role of protecting the assets and values of the Asset Pool, for the benefit of both the

landowner/proponent and the investor.

The Trusteeship shall generally cover the performance of the following roles:

A. Special Purpose Trust;

B. Escrow and Conveyance Agent;

C. Controller;

D. Custodian;

E. Bond Counsel;

F. Third Party Consultant; and

G. Underwriter/Placement Agent

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VI. Business Plan

Securitization mandates the preparation of a Business Plan for the Project which shall generally define

the purpose for which the funds are being raised and the potential sources for the repayment of these

funds. The Business Plan shall be made available to potential investors to assist them in determining the

soundness of the Project’s implementation strategy and financial viability, and subsequently, the

attractiveness of investing in the Certificates, Notes or Bonds, issued to finance the development. Among

others, the Business Plan shall contain the following:

1, Project Description;

2. Target Market;

3. Development Plans and Timetable;3. Development Plans and Timetable;

4. Implementation Strategies;

5. Financial Projections;

6. The issuance and public offering of project-backed securities involves various elements for its success. Specifically, these elements include the following:

A. Registration of the Securities (if required);

B. Offering Prospectus;

C. Enhancers;

D. Underwriting

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VII. Strategies

Global First Financial Partners, Inc. (GFFP), acting as the co-underwriter, believes that to make the

securitized papers attractive to the capital market, the following layers of protection to the investors or to

the buyers of the Certificates, Notes or the Bonds, must be considered as an integral part in the offering,

among other things, as follows:

1. Asset Pool;

2. Third Party Guarantees and reinsurer or co-guarantees or enhancers;

3. At least 20% of the amount raised shall be placed under reserved funds or sinking funds. The funds will then be invested in a high yielding products that can provide high fixed returns during the life of the bonds; life of the bonds;

4. There must also be a Governing Body that will administer the Funds, to make sure that the funds are not diverted to other purpose other than the Project. The Governing Body that will administer the funds are as follows:

A. The Trustee Bank;

B. The Landowner;

C. The Project Developer;

D. Representative from the Insurers or Third Party Guarantors; and

E. Controllers and Auditors

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VIII. Definition of TermsFor the purpose of this Presentation, the following words and their definitions are used:

1. Asset Pool - Means the consolidation of all the “assets” of the Project, which is composed of:

a) Beneficial interest of the Project, owned and titled;

b) Proceeds of the marketed Certificates or Bonds;

c) Proceeds and income from the sales of the condominium units, leases of all commercial

structures, products produced by the project, etc.;

d) Other income of the Project;d) Other income of the Project;

f) In case of condominium or housing projects, the individual titles; and

g) And all those listed in this Primer under Asset Pool.

2. Beginning of Securitization - When there is an enabling Asset Pool formation and Trust Agreement with the Trust Department of a Bank which then becomes the Trustee and nominal issuer of the Certificates or the Bonds;

3. Bond or Certificates, or Notes - A debt, or an I.O.U. from an issuing entity to a Bondholder;

4. Bondholder - Buyer of the Bond. the investor.

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Definition of Termscontinuation (2)

5. Credit Enhancements or Third Party Guarantors - Techniques used by debt issuers to raise

the credit rating or the credit worthiness of their offering, and lowering their interest costs;

6. Securitization - GFFP have three (3) definitions of Securitization for purposes of this Presentation, as follows:

a) The process of creating a financial instrument (like Municipal Bonds, Revenue Bonds, Asset

Participation Certificates or Bonds, and others), or otherwise called “securitized papers”, and

then marketing them to accredited investors, which are called “Bondholders”;

b) A financial engineering process where an Asset Pool Trust is created from the inputs of the

Project to back the issuance of an “Investor’s Certificates” or Bonds, or Notes, promising themProject to back the issuance of an “Investor’s Certificates” or Bonds, or Notes, promising them

stipulated yields and redemption of the principal investments at the end of a specified terms;

and

c) Process of distributing risks by aggregating debt instruments in a Pool, then issuing new

securities backed by the Pool.

7. Securitization Certificates - It represents a pro-rata undivided participating beneficial interest of the Holder in the Asset Pool, subject to the stipulations on redemption or termination of the Holder’s participation. The Holder’s participation does not extend to Land Ownership and Project Profits, and is terminated upon redemption of the Certificates.

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Definition of Termscontinuation (3)

9. Issue Date, Redemption and Maturity - The Asset Pool and its components shall revert back to the Project Proponents (the Landowner/Developer), upon redemption of the Certificates or the Bonds at maturity (or even before the maturity if the cash flows allows). They shall have a uniform issue date which shall be the reference date for the computations of the “special” fixed return;

10. No Evidence of Recourse or the Securitized - Papers are on a without recourse basis. A securitization certificates or the bonds does not constitute any right or evidence of recourse against the Trustee, the Land Owner or the Project Proponents, in as much as it is a holding chargeable directly and exclusively to the Pool;

11. Trustee Bank - The bank holds the title to the financial assets or the Asset Pool in behalf of the Trustor or investors or buyers of the bonds for the benefit of the beneficiary of the Funds;or investors or buyers of the bonds for the benefit of the beneficiary of the Funds;

12. Trustee Registration - Each and all Securitization Certificates shall be registered with the Trustee Bank which keeps a registry for this purpose; and

13. Special Purpose Trustee/Trustee Bank - The Asset Pool Certificates are all placed under the trust and protection of the Bank per provision of the Special Purpose Indenture or Trust Indenture.

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Definition of Termscontinuation (4)

It is GFFP’s view that the most practical and expeditious way of raising funds for a Project would be the

Project Securitization approach. Borrowing from a bank requires several restrictions or requirements,

such as, equity of the borrowers, credit histories of the people behind the company, debt-equity ratio of the

borrowing corporation, and many others.

In the case of Project Securitization there is check-and-balance in the use of the funds. The investors or

buyers of the, Notes Certificates or the Bonds, have layers of protection, that in the remotest possibility

that there is default, the Investors can depend on the Asset Pool, the third party guarantors and the

reserved funds or the sinking funds.reserved funds or the sinking funds.

On the other hand, the insurers or third party guarantors can take secondary position on all the underlying

securities of the bonds. Moreover, there is no way that the project cannot be completed, because the funds

are available. The Project does not rely on pre-selling of condo units or housing units or timeshares in case

of hotels being converted into timeshares, etc., because there are available funds to finance the

development aspect of the project.

The payments and/or collections from pre-selling activities like down payments, reservation fees, etc., are

entrusted to a Trustee Bank, and not generally used to finance the Project.

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Definition of Termscontinuation (5)

In case of default therefore, the Trustee Bank can sell the property as a complete Project, on behalf of the

Guarantors. The Bond issues provides life of the bonds, like 10-year bond, and a bond redemption period,

like semi annually or yearly, and the bonds are partly redeemed from the bondholders, covering principals

and the accumulated interest or yield on the bonds.

There are bondholders however that opts to either trade their bonds in the capital market, or just simply

hold onto it as the yield are good or profitable enough, compared to other bonds in the market.

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How other known corporations sees “securitization”.

Real Estate Securitization

Typically, this refers to transactions with built-in financial structures that guarantees liquidity, as the equity is held in small-lot ownership in the form of securities that represent the right to receive cash flow generated by the real estate asset. This is useful for real estate transactions where liquidity (distributility) is perceived as poor and the price of the transaction tends to be high. Using this scheme, we develop and manage rental condominiums, be high. Using this scheme, we develop and manage rental condominiums, logistics distribution facilities, commercial facilities, office buildings etc., which we then sell to investors in Japan and abroad.

Itochu Corporation

How other known corporations sees “securitization”

continuation (2)Securitization of Real Estate:• Mizuho offers financing options such as real estate

securitizations of our customers' real estate holdings (e.g.,office buildings, residential housing, and commercialfacilities). "Real estate securitization" refers to the processwhereby income generated from real estate properties, andthe value of the properties themselves, are used ascollateral to secure a loan that is then used by a specialpurpose company (SPC) to purchase the said properties.Loans in such transactions are typically non–recourse (i.e.,only cash flows generated from the real estate properties, orproceeds from the sale or refinancing of such properties, areused to repay the loan).

• Such deals offer several benefits to customers. The first is• Such deals offer several benefits to customers. The first isto strengthen their financial base by improving return onassets (ROA) and reducing the amount of interest–bearingliabilities, through moving assets off the balance sheet. Thesecond is to diversify their financing methods by utilizingthe income that is generated from their real estate.

1. The real estate owner (the customer) agrees to selltheir real estate to the SPC;

2. The SPC obtains funds for the purchase in the form ofa non–recourse loan and investment capital.

3. The SPC pays the real estate owner (the customer)the funds for the purchase.

4. The SPC uses the cash flows generated from the realestate properties to make interest and principalpayments on the loan, and to pay dividends toinvestors.

Mizuho Bank19

How other known corporations sees “securitization”

continuation (3)

Export FinanceSecuritization offers companies a strategic funding alternative by enabling them to monetize assetswith predictable cash flows into a capital source, thus restructuring their risk profile, and in somecases, by moving the assets off balance sheet. Securitization offers investors the benefits of creditquality as well as yield enhancement since asset-backed securities represent rights to future cashflow from the underlying collateral. Citibank is internationally renowned for introducing a number of"firsts" or innovations in the asset-backed and mortgage-backed securities markets, ranging fromthe securitization of future royalty revenues and note monetization to underwriting collateralizedmortgage obligations and a wide variety of mortgage-related products. We have securitized overUS$ 40 billion worth of assets worldwide.

Project FinanceProject Finance

The rapid growth of the emerging economies and the industrialized economies' need forinfrastructure upgrades have created substantial financing needs for power plants,telecommunications networks, oil and gas development, mines, water treatment facilities, tollroads, and airports. Citigroup helps project sponsors obtain funding (often non-recourse) on thebasis of future project revenues. We offer clients advice, loans, bonds, export credit, andmultilateral agency financing, as well as local currency financing, foreign exchange, and cashmanagement. Citibank works on a regular basis with all the major corporations worldwide. Ourtailor-made advisory teams draw from their expertise on comparable transactions in bothemerging and liberalizing markets and typically have a wealth of global experience.

Citibank

Contact Us:

Global First Financial Partners, Inc.

108 Orchard Terrace, Union,

New Jersey 07083

P: 1-908-463-9417

W: www.globalfirstfinancial.net

Contact Person:

FERNANDO M. SOPOT

President & CEO

E: fms@globalfirstfinancial.net