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September 2022 Q3 (v)

A

Ashna Satyajit

Keen member
Hi,
I just wanted to check if I grasped the concept of Q3(v) of the September 2022 exam correctly.

The two methods suggested by the CRO in this question are essentially to reduce the obligations of the interest repayments UA would need to make to the loan providers.
So, instead of it being Loan provider <--> UA <--> Social projects <--> Government

the CRO is trying to create the link of Loan provider <--> UA <--> Government
by using either the repo rates UA will receive from the Government on providing the loan principal as capital, to pay back the interest to the Loan provider. And naturally earn a return in the process.

or create the link of Loan providers <--> UA <--> total return swap
by using the return received on the TRS to pay back the interest to the Loan provider. And naturally earn a return in the process based on the TRS.

Would love it if someone could help me understand if I've missed something or understood this correctly. Lost a lot of marks on Q3 in my last attempt :p
Thanks!
 
It was a really tricky one to get your head round I would say. I think the examiners were thinking that after making the loan to the social project, rather than waiting for the government agency to approve the project and make the payment, they would use the loan that they had made to the social project as collateral in a repo agreement with the government agency. That would mean that UA gets the money from the government much more quickly, in return for providing the loan as collateral. The repo would bridge the gap. And when the repo matures, the government would be ready to approve the grant anyway, so the original loan would be repaid. Not 100% clear from the limited info in the question. The total return swap solution would involve finding a counterparty willing to give you fixed + margin in return for the actual yield on the loans to the social projects. Once you get the uncertain social project return swapped for something more certain, it would then be easier to get loans from the investors who are ultimately financing UAs loans.
 
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