In­fra Se­cu­ri­ti­sa­tion: It’s Time to Bite the Bul­let

The Economic Times - - Money & Banking - SUDIP SURAL

pri­mary in­vestors. Trans­ac­tion vol­ume touched an all-time high of ₹ 1 lakh crore in FY17, led by as­set-backed and mort­gage-backed se­cu­ri­ties.

Vol­umes started tak­ing off in FY15, driven by banks meet­ing pri­or­ity-sec­tor lend­ing re­quire­ment (banks pre­ferred to lend more to the re­tail seg­ment given bad loan is­sues in the cor­po­rate seg­ment). Also, the clar­i­fi­ca­tion on dis­tri­bu­tion tax for se­cu­ri­ti­sa­tion spe­cial pur­pose ve­hi­cles in the bud­get for last fis­cal caused mu­tual funds to re­turn to the se­cu­ri­ti­sa­tion mar­ket as in­vestors, ad­dress­ing one of the key chal­lenges of the mar­ket since 2013.

3. In­sur­ers, pen­sions, nat­u­ral in­vestors Pen­sio­n­andin­sur­ance­fund­s­tendto have­long­in­vest­men­tho­ri­zons,soin­fras­truc­ture­as­set­sare­anat­u­ral­go­od­fit. Theopeningupof pen­sion­fund­sto newas­set­classes­suchas­realestatein­vest­ment­trusts,in­fras­truc­turein­vest­ment­trust­sand­in­fras­truc­ture­debt fund­shas­ben­e­fit­ed­sub­scribersin termsof di­ver­si­fi­ca­tio­nand­su­pe­ri­or­re­turns.

In­fras­truc­turese­cu­ri­tised­pa­pers,too, can­beanop­por­tu­ni­ty­given­theirat­trac­tiveyield­sand­longtermna­ture, pro­vid­edthey­have high­safe­tyrat­ings(AAand­above). In­surance­fun­dreg­u­la­tion­sper­mit­in­vest­mentsin­se­cu­ri­tisedas­set­srated AAand­above,andthereisaman­dated min­i­mu­min­vest­mentof upto10-15% in­in­fras­truc­ture­sec­tor.

4. Op­ti­mal­struc­ture­forin­frase­cu­ri­ti­sa­tion In­sti­tu­tional in­vestors are re­luc­tant to bear the con­struc­tion risk in­her­ent in in­fra­struc­ture. There­fore, as­sets suited for se­cu­ri­ti­sa­tion will be those achiev­ing com­mer­cial op­er­a­tions date, with a min­i­mum re­pay­ment his­tory of 6 months to 1 year, and a min­i­mum stand­alone credit rat­ing of BBB, with 10-12 years con­ces­sion ten­ure re­main­ing.

In the ab­sence of a mar­ket for low­er­rated se­cu­ri­tised pa­pers, it is en­vis­aged that the com­plete as­set pool be sold through a sin­gle class of se­cu­ri­ties rated AA or above. The un­der­ly­ing as­set pool will need to im­prove its credit qual­ity and meet in­vestor ex­pec­ta­tions, which will be pro­vided by a three-tiered credit en­hance­ment struc­ture in­clud­ing an ex­cess in­ter­est spread, a cash col­lat­eral, and a guar­an­tee fa­cil­ity.

5. In­vestors ex­pect 75 bps pre­mium on AA se­cu­ri­tised in­fra pa­pers In­sti­tu­tional in­vestors in In­dia ex­pect a pre­mium of 75 ba­sis points (bps) over pre­vail­ing rates for AA rated vanilla is­suances as ad­e­quate com­pen­sa­tion for struc­tural risk.

Given­thatAA-rat­ed­cor­po­rate­bonds areprice­dat8.3-8.5%,theyield­wouldbe 9.05-9.25%on­pass-throughcer­tifi­cates rat­edAA,which­would­matchthein­vest­men­to­b­jec­tivesandtenur­erequire­mentsof in­sur­ersand­pen­sion­funds.

6. As­set pool sup­ported by tiered credit en­hance­ment­mech­a­nism Of the to­tal credit en­hance­ment re­quired (12-15% of the pool prin­ci­pal), it is en­vis­aged that the first loss pro­tec­tion for the as­set pool will be pro­vided by a cash col­lat­eral fa­cil­ity is­sued by the orig­i­nat­ing bank, backed by ex­ter­nal guar­an­tee. The guar­an­tee is en­vis­aged 10-12% of the pool prin­ci­pal (pro­vided against a guar­an­tee fee of 1-2% of the guar­an­teed amount).

ADB-CRISIL study shows it can free up cap­i­tal for lenders, and en­hance fund flow to in­fra projects

7. A gov­ern­ment en­tity for guar­an­tees Ab­sent com­mer­cial en­ti­ties with ro­bust credit rat­ings to guar­an­tee se­cu­ri­ti­sa­tion trans­ac­tions, a fi­nan­cial in­sti­tu­tion such as IIFCL could step in as a mar­ket maker for now, though over the longer term, we would need the pro­posedBondGuar­an­teeFundof In­dia to come into be­ing.

8. A win-win for is­suers, in­vestors Thekey­ben­e­fit­sof thestruc­turein­clud­ere­leaseof in­vest­mentsur­plus equiv­a­lent­tothe­p­ool­prin­ci­palas­the com­plete­as­set­poolis­sol­dtoin­vestors. The­p­ro­vi­sionof guar­an­teeasasec­ond­loss­cred­iten­hance­men­ti­sa­nun­fund­ed­com­mit­ment­fortheis­suin­gen­tity, and­could­be­off­set­byaguar­an­teefee. In con­clu­sion, for In­dia’s in­fra­struc­ture se­cu­ri­ti­sa­tion mar­ket to take off, as­set pool se­lec­tion needs to ad­dress ho­mo­gene­ity and avoid con­struc­tion stage risks, while ex­clud­ing as­sets with lower re­cov­ery rates such as ther­mal power. Ap­pro­pri­ate credit en­hance­ment­mech­a­nis­mis­need­edto suit the risk ap­petite of long-term cap­i­tal mar­ket play­ers, along with an in­sti­tu­tional mech­a­nism to pro­vide mon­i­tor­ing and over­sight for the un­der­ly­ing pool of as­sets.

Newspapers in English

Newspapers from India

© PressReader. All rights reserved.