Prof Rao Securitization India

7/31/2019 Prof Rao Securitization India

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Securitization Market in I ndia


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Securitization issuance in emerging markets

Emerging markets total $ 53 bn in 2005.

8.6EEMEA14LatinAmerica

117.77Asia1.3Others81Japan

0.5Columbia0.6Indonesia

0.2Others0.7Peru0.4Malaysia

0Russia0.9Chile1.2Singapore

1.7Egypt1.5Argentina6.67India

2.2South A fri ca4.3Mexico26South Korea

4.5Turkey4.8Brazil1.9Taiwan

EEMEALatin AmericaAsia

I ssuance in $bnCountryIssuance in $bnCountryI ssuance in $bnCountry


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0

5

10

15

20

25

30

Country

Billion $


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The three stages of securitization in I ndia

The early years

The growth phase

The new era


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Securitization in India: Landmarks

The earl y years The Growth Phase The new era

1992 2001 2002 2004 20062000

First auto loansecuritization

First M BSFirst partial guarantee(PG) rated structure

First multi -asset CDO

RBI issuesguidelines onsecuritization

First securitizationincluding propertyreceivables

First offshore transactionbacked by aircraftpurchase receivables

First revolvingsecuritization i nvolvi ngworking capital facil i ties


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Securitization began with the sale of consumer loan pools.

Ori ginators directly sold loans to buyers.

Originators acted as servicers and collected installmenst dueon the loans.

Creation of transferable securities backed by pool receivables(known as PTCs) became common in late 1990s.


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There were approximately 75 issuances each year.

Average issue size was about Rs.1900 million.

There was pressure on the resources of large originators dueto continued growth in consumer credit.

From 2004 to 2005, 40% of vehicle finance was fundedthrough A BS backed by auto loans.


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The growth of debt funds, the largest investors in securitizedpaper, also supported the expansion of the market .

Citibank completed India's first revolving securitisationissuance for its small and medium enterprises working capitalloans in 2004.

The fixed rate issuance of Rs 50 crore comprised two seriesof pass through certificates with bullet maturity of two years.

Strong performance and higher yields also attracted investors.


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Growth of Indian Securitization Market

Growth of Indian SF market

0

75

150

225

300

375

2002 2003 2004 2005

150

120

90

60

30

0

25

7590

127

Values Number of Deals

Source: ICRA rating Feature


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Product Wise Growth Pattern of Indian Securitization Market

0

50

100

150

200

250

2002 2003 2004 2005 2006

ABS M BS CDO PG OthersSource: ICRA report


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Milestones in the growth of Securitization market in India

The first deal in India was in 1992 when Citibank securitized autoloans and placed a paper with GIC mutual fund worth about Rs. 16Crores.

In 1994-95, SBI Caps structured an innovative deal where a pool offuture cash flows of high value customers of RSIDC weresecuritized.

ICICI had securitized assets to the tune of Rs.2,750 crore in itsbooks as at end M arch 1999.

Another novel move was by M aharashtra government to securiti zesales tax. The M aharashtra V ikrikar Rokhe Pradhikaran (M V RP) isthe SPV to undertake this first of its kind transaction in the country.


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Securitization of rated transactions increasedfrom less than Rs.1,000crore in 1998, to overRs.30,000 crore in 2004 05. (Rs.1 crore =Rs.10 million).

An oil monetization deal has been structuredwhere the future flows of oil receivablesaccruing to a company were securitized.


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L & T has securi tized lease receivables even before a powerplant was completed.

This has opened a new vista for financing power projects.

This securitization deal financed even the assets to be created

in future.

The National Housing Bank (NHB) has made efforts tostructure the pilot i ssue of mortgage backed securities (M BS).


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Characteristics of Securitization market in India

High concentration of originators.

Number of originators was less than 5 in 2000, andhas become more than 20 in 2005.

The top five originators account for 90% of theissuance volume.

Banks have not yet adopted securitization because ofregulatory concerns.


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Preference for highest rated tranches.

Focus is on the short end of the maturity.

Investors appetite is restricted to senior tranches thatcarry the highest ratings AAA / P1+.

Originators retain the junior tranches as unrated paper.


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Bond like characteri stics of PTCs.

PTCs are structured to have a predetermined scheduleof monthly interest and principal payments to be paidon timely basis.

The structure in international market is differentwhere interest is paid on a timely basis and principalis repaid according to instrument maturity.


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High level of credit enhancement compared tointernational norms.

Enhancement in the form of overcollateral, etc.cover credit losses.

Timing mismatches due to delayed collection arealso covered.

Bond-like outflows coupled with volatile inflowsrequire high enhancement l evels.


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Domination of A BS.

Securi tization has a 100% compounded annual growth rate, ofwhich ABS accounts for over two-thi rds of issuances.

The growth of M BS was hindered by the low investor appetitefor longer tenor assets.

CDOs have also not taken off as they are unattractive to theoriginators due to high level of credit enhancement needed.


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Past Trends in I ndian Securitization market

Routing the transaction through an SPV yet to gain popularity.

Absence of active secondary market for securitized debt.

The market was ti l l recently unregulated.

Lacked transparency in volume, price, parties to thetransaction, etc.


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Past Trends in I ndian Securitization market

M ost deals in the past involved:

The transfer of beneficial interest on the asset and not thelegal title.

The pass-through mechanism.

A n escrow mechanism for payment to the buyer.

Direct purchases of receivables by financial institutions,and bigger NBFCs.


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Opportunities in I ndian securitization market

RBI guidelines on securitization of standard assets haveencouraged originators to look at potential cost effectivesolutions for structuring the securitization transactions.

The third party participation in the transaction is alsoencouraged.

The concept of mezzanine debt, and repackaged PTCs whichare already prevalent in global structured finance market canbe adopted in India now.


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ABS: Distribution by Asset Class ABS : Distribution by asset class

Car sConstr uction equipmentsUtil ity VehicleOther sTwo wheeler sPer sonal loan


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Growth of the Indian ABS Market

0

50

100

150

200

250

2002 2003 2004 2005

Value Average deal size

10

8

6

4

2

0


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Prepayment trends in ABS in India Prepayment rates vary significantly across asset classes as the highestis in personal loans (PL), and lowest is commercial vehicles (CVs).

Established prepayment trends are changing for e.g. prepayment ratesin CV pools are increasing though it still remains the lowest whereasprepayment rates in most other asset classes are declining.

Repossession driven prepayment are increasing in importance like inCVs.

Prepayment effects pool duration, especially in PL pools.


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Mortgage Backed Securitization in I ndia M BS has potential for high growth as:

There is significant expansion in housing finance.

The largest ever transaction of M BS in India wasRs.12 bil lion mortgage backed pool of ICICI Bank.


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Credit Enhancement Credit enhancement uti l ization

Barring two transactions, the util isation has been wi thin10% of the available level.

0.85%Median2.01%Maximum0.58%Minimum


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Hurdles in the growth of MBS in I ndia Long tenure of M BS paper together with the lack ofsecondary market liquidi ty.

Unlike retail vehicle loans, home loans in India either get re-priced or prepaid, which exposes the structure to significantprepayment / interest rate risk, thus leading to requirement ofhigher credit enhancement.

The presence of fixed rate PTCs backed by vi rtually f loatingrate loans is another hurdle.


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Growth of MBS Market in India

0

10

20

30

40

2002 2003 2004 2005

16

12

8

4

0

Value Number of Transactions


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Classification or Tranches

SeniorSubordinatedMezzanineEquity notes

Creditrating

Tranche


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Mezzanine PTCs in the Indian marketMezzanine debt can be applied to any securitization transactionincluding ABS, MBS, and CDOs.

Retail ABS can be a preferred option due to less volatile andmore predictable performance.

CDOs are also a gainful option because the underlying defaultstatistics used for structuring CDOs are highly robust andreliable.


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Scope of Mezzanine Tranching

Capital Structure of TraditionalIndian Securitization trust

Equity

Senior PTC

TotalCapitalization100%

TotalCapitalization100%

Senior PTC

Equity

Mezzanine PTCs

Capital Structure of securitizationtrust with mezzanine trust


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Impact of introduction of MezzaninePTCs in the Indian market

The Mezzanine PTCs will address the capital pressureoriginators face, which will help revitalize the market.

The public sector banks, which account for three-fourth of theassets of the banking sector, are likely to adopt securitization.

In case of upgrades of mezzanine tranches, the investorstands to gain both in terms of capital provision as well asmark to market gains / realized capital gains.


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The repackaged PTCs Tranching post repack

Pre repack Post repack

Originallystipulatedfirst loss

Originallystipulatedsecond loss

Senior repackagedPTCs

Mezzanine tranche =now required second loss

Equity= now requiredfirst loss


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ABS Sectors in the USA

0

100

200

300

400

500

$bnSectorsHome equity Credit card AutoStudent loan Other Private ABS

Source the Bond market association


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I ssuance of mortgage backed securities inUS

Source: US Federal agencies

0.0

500.0

1000.0

1500.0

2000.0

2500.0

Agency backed CMO Private labled

1990 1993 1996 1999 2002 2005


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RBI Guidelines on SecuritizationNew guidelines announced by RBI in February 2006.

True sales requirement, and capital requirement for creditenhancement have become more stringent.

The new regulation encourages third party participation in thetransactions.

Third party enhancement providers now receive preferentialtreatment over originators providing the same service.

The profit arising from sale of assets is to amortized over the lifeof instrument.


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Regulatory environment in India forsecuritization

Settlement procedures were not well defined before the newRBI guidelines issued in February 2006.

Lack of accounting and valuation norms (Guidance Note nowissued by ICAI)

Only a few states have relaxed stamp duty levy.

Taxation issues are yet to be resolved.

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Prof Rao Securitization India