Infra Securitisation: It’s Time to Bite the Bullet
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.