Valuation Of SME Credit Loan Obligation

First and foremost, we make comparisons between three financing methods:direct financing, indirect financing and securitization, by choosing three measures:financing costs, funds arrival rate, and the degree of freedom of subjects. We provedqualitatively that credit asset securitization is an efficient way to solve SME financingproblem, not only because it entails the characteristics of relatively low costs, but alsobecause it has high funds arrival rate, and high degree of freedom to the subjects.Therefore, securitization as a financing tool has more advantages compared with othertools. We introduce the SME-loan obligation (CLO) and its detailed transactionprocess. Considering that valuation is the most important part in the process ofsecuritization, we then analyze the current scheme of SME-CLO, basing on which webring up various methods of pricing the security and then discuss the advantages anddisadvantages of each method. With a qualitative analysis, we present twodistinguishable characteristics of SME-CLO future cash flows:1. the prepayment rateis settled at a relatively low point;2. Default is a crucial factor that impact future cashflow. In order to conform to these two characteristics, we set up an equilibriumpricing model to measure the default risk premium of SME-CLO, with the assumptionof perfectly diversified portfolio pool. Last but not the least, we use Monte Carlosimulation to simulate the equilibrium pricing model and come to the conclusion:compared to risk-free rate volatility, loan rate volatility is a variation that is muchmore important in determining default risk premium (namely, default value).Therefore, it is crucial to take “loan rate volatility” into consideration when settingthe fixed rate and floating rate in the Equilibrium pricing model.