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State of Indian Securitization Market, 2016
1
State of Indian Securitisation
Market, 2016
Vinod Kothari Consultants Pvt. Ltd.
State of Indian Securitization Market, 2016
2
Copyright and Disclaimer
This report is the property of Vinod Kothari & Consultants Pvt. Ltd. No part of it can be extracted,
reproduced or circulated in any manner.Citations are welcome only with credit to us.
About the Author
Ms. Nidhi Bothra ([email protected])
Ms. Nidhi Bothra is an associate member of the Institute of Company
Secretaries of India (ICSI). She is an author and trainer on various topics in
financial services sector. She specializes in areas of leasing, securitisation,
covered bonds and other financial instruments, mortgage lending,
affordable housing finance, housing microfinance, asset reconstruction
business etc. She is one of the directors of Indian Securitisation Foundation,
the only association body steering growth and development of capital
market instruments in India.
Contributors to the Report
Global Scenario
The same has been contributed by Ms. Surbhi Jaiswal and Team Vinod Kothari Consultants Pvt. Ltd.
Contact The data noted in this report is based on published annual reports of various companies, however certain
assumptions have also been made during the data collation and analysis. In case of any inaccuracy in any
of the data noted, the respective company can report the same at the following email ids:
State of Indian Securitization Market, 2016
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Contents Brief history of Securitisation in India ..............................................................................................6
Securitisation structures prevalent in India .....................................................................................7
Key Differences between DA and PTCs route ...................................................................................8
Typical originators and investors ......................................................................................................9
Various asset classes .........................................................................................................................9
Drivers for securitisation in India ................................................................................................... 11
Originators’ incentives ................................................................................................................ 11
Investors’ incentives .................................................................................................................... 12
Volumes over the years ............................................................................................................... 12
Innovative structures in the recent past ...................................................................................... 15
Regulatory Scenario: Securitisation ................................................................................................ 17
Securitisation Regulations by RBI ............................................................................................... 17
SEBI’ Regulations pertaining to securitisation ............................................................................ 19
Assignment of debt or receivables: .......................................................................................... 19
Schemes of special purpose distinct entity ............................................................................... 19
Credit enhancement and Liquidity facility .............................................................................. 19
Holding of the originator ......................................................................................................... 20
Offer to Public ......................................................................................................................... 20
Mandatory listing and rating for securitised debt instruments ................................................ 20
NHB’s Regulations ...................................................................................................................... 20
Tax Issues: Securitisation ............................................................................................................... 23
Introduction of distribution tax ................................................................................................... 23
Pass-through status to securitisation trusts ................................................................................. 23
Exemption for TDS ..................................................................................................................... 23
FPIs investment in ABS .................................................................................................................. 25
PSLC guidelines impacting securitisation demand ......................................................................... 25
Future outlook ................................................................................................................................ 27
Global Scenario .............................................................................................................................. 28
Recent Securitisation Structures ..................................................................................................... 29
Fannie Mae and Freddie Mac Credit Risk Transfer Transactions ..................................................... 29
Peer to peer lending securitization – U.S. .................................................................................... 30
State of Indian Securitization Market, 2016
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Alibaba’s microloan securitisation-China’s first ......................................................................... 31
Dunkin’ Brands $2.6Billion whole-business securitisation .......................................................... 32
Solar securitization ..................................................................................................................... 32
Recent Regulatory Changes ............................................................................................................ 34
State of Global Securitisation Market ............................................................................................. 35
United States of America .............................................................................................................. 35
Europe ......................................................................................................................................... 38
Asia ............................................................................................................................................. 39
China .......................................................................................................................................... 39
State of Indian Securitization Market, 2016
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List of Figures
Figure 1: Prominent assets classes for securitisation in 2016 ..................................................................... 15
Figure 2: The volume of Asset-backed securities issued in last 20 years ................................................... 35
Figure 3: The volume of mortgage-backed securities in the last 20 years in US ........................................ 36
Figure 4: The volume of issuance of CMO securities in last 20 years........................................................ 36
Figure 5: The volume of CMBS issuance in the last 20 years .................................................................... 37
Figure 6 :The volume of US Non-Agency RMBS issuance in the last 20 years ........................................ 38
Figure 7: Securitisation China & South Korea ........................................................................................... 40
List of Tables
Table 1: Milestone of Indian Securitisation .................................................................................................. 7
Table 2: Difference between direct assignment and pass through certificates ............................................. 9
Table 3: Securitisation volumes over the five years ................................................................................... 13
Table 4: Historical data on the issuance of securitisation securities ........................................................... 28
Table 5: Volume of placed issuance of securitised products ...................................................................... 39
State of Indian Securitization Market, 2016
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Brief history of Securitisation in India
Securitisation as a financial instrument has been in existence in India from the early 1990s.
Despite being in existence for over two decades securitisation market in India continues to be in
its nascent stages. The securitisation market in India has had several regulatory and taxation
concerns in the past which have impacted the securitisation volumes and have had lesser impact
from external shocks or opportunities.
Securitisation in India is in several ways very different from the rest of the economies. The term
securitisation, in India, has reference to the SARFAESI Act (Securitisation and Asset
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002). The
SARFAESI Act came into existence with the intent of facilitating securitisation in India and also
addressing the rising problem of non-performing assets. However the law did not create any
facilitating provisions of securitisation. In India, there is no overarching regulation pertaining to
securitisation transactions in India. In other words, transactions of securitisation are covered by
common law. There are, however, regulations on securitisation activities of banks and NBFCs.
Another distinctive feature of securitisation in India versus the rest of the world is that while
securitisation is seen as a financial instrument for capital market access in India, barring one
most of the securitised paper is unlisted and therefore not facilitating any capital market access.
Globally securitisation is seen as a tool for off balance sheet funding facilitating capital relief,
however in India the key drivers for securitisation have been allowing banks to meet the priority
sector lending targets. Therefore, securitisation in India is driven by several factors that are
unique to India and do not have global relevance. Following Table 1 shows the securitisation
deals in India over the past few years.
Year Originator Milestone Deal Value
1991 Citibank First securitisation deal (GIC Mutual
Fund)
Rs. 160 mn.
1999 L&T 1st securitisation of lease rentals Rs. 4090 mn.
1999 Citibank First securitisation personal loans Rs. 2841 mn.
2001 Jet Airways First securitisation of aircraft
receivables
Rs. 16000 mn.
2001 Govt. of Maharashtra First securitisation of Sales Tax
deferrals
Rs. 1500 mn.
2001 Karnataka Electricity Board First deal in power sector Rs. 1940 mn.
2002 ICICI bank First Collateralised Debt Obligation
(CDO)
2003 Citigroup First floating rate securitisation Rs. 2810 mn.
2005 Indian Railway Finance
Corporation
First ever sovereign lease
receivables
Rs. 1960 mn.
2007 ICICI Bank Largest securitisation deal Rs. 19299 mn.
State of Indian Securitization Market, 2016
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Table 1: Milestone of Indian Securitisation
Source: D&B and ARCIL
Securitisation structures prevalent in India
Speaking of distinctive features of securitisation in India, another departure from global practices
is that in India there are two models/ structures of securitisation transactions.
Securitisation for large part of its existence in India has been used as a device for bilateral
acquisition of assets by banks/ financial institutions. Bilateral assignments have dominated the
securitisation market in India, where around 80% of the securitisation in India is in the form of
bilateral sales. Apart from bilateral assignments (also called direct assignment) deals,
securitisation transactions have also used SPV structures, more popular and known to the rest of
the world. In India, some quasi-securitisation structures have also been used where creation of
any form of security was rare and the portfolios ended from balance sheet of originator to
another. In India, assignment of receivables carried out bilaterally between banks and financial
institutions without the use of an SPV as a conduit is referred to as bilateral assignment and
where an SPV is used for converting the receivables to securities it is called securitisation.
A special purpose vehicle, typically a trust is created to cordon off the receivables of the
originator into a bankruptcy remote entity which in turn will issue asset backed securities to
investors. It is worthwhile to mention here, that while asset-backed securities in the rest of the
world are denoted based on the underlying assets they represent (for instance, residential
mortgage backed securities, commercial asset backed securities, asset backed commercial paper
and so on), in India, the securitised paper was called pass-through certificates or PTCs as they
represented beneficial interest in the receivables. Therefore the securitisation structure is often
referred to as PTCs route in India as well.
The first set of guidelines for securitisation of standard assets was issued by RBI in February
20061. The issuance of these guidelines was subsequent to the market witnessing some seasoning
on securitisation transactions. The guidelines were the first attempt to regulate the securitisation
transactions. The regulations focused largely on securitisation transactions using the special
purpose vehicle, however direct assignments were not regulated by RBI then. The regulatory
arbitrage prompted market to have an inclination towards doing more of bilateral assignments
than securitisation.
1 https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=2723&Mode=0
State of Indian Securitization Market, 2016
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Key Differences between DA and PTCs route
From the discussion above, the key distinction between DA and PTC route are as shown in
Table 2
Securitisation Direct assignments
Legal format Assignment required Assignment required
True sale Yes Yes
Transferability of a single loan No Yes
Bankruptcy remoteness Yes, provided SPV does not
get consolidated
Yes
Special purpose vehicle Yes No
Participation by multiple
investors
Yes Yes, but as a joint ownership
Nature of investment made by
the investor
Purchase of the securities of
the SPV
Purchase of the underlying
pool
MHP Applies Applies
Risk retention Usually by credit
enhancement
Mandatorily pari-passu
Rating of the securities Usually uplifted, and may go
upto AAA
No question, as investor buys
a pool of loans
Upfront encashment of profit Possible Required
Due diligence by investor Only based on the evaluation
of the securities of SPV
Based on individual loans
Use of excess spread to meet
losses
Most commonly yes No
Servicing fee Yes Yes
Subordination of servicing fee Not common Yes, possible
Cap on the extent of
investment
20% No such cap
Partial assignment Yes Necessarily yes
Exposure of the investor for
concentration norms
On the underlying loans On underlying loans
Accounting in the books of the
investor
Purchase of a security Purchase of loans
MTM requirements Applicable Not applicable
Capital relief Capital eaten up to the extent
of first loss support
Full capital relief, as
originator provides no credit
enhancement
Pricing Based on the rating of the
resulting securities
May be worked out after
considering losses and
prepayments upto a certain
State of Indian Securitization Market, 2016
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level
Liquidity from investor
perspective
Yes, the PTCs are
transferable. The platform
may allow other investors to
buy PTCs being sold by an
outgoing investor
No. Loans may be bought and
resold but not very convenient
Conversion into a standard
marketable denomination, say
Rs 1 lac per unit
Possible and very common Not possible. The whole loan
has to be transferred
Simplicity Not usually very simple to
execute
Very simple to execute
Tax issues Tax issues currently faced on
taxation of SPVs
No tax issues at all, as direct
transfer of the asset
Tax deduction at source by the
borrower
Does not apply Applies
Distribution tax Applies, upto 1st June 2016 Does not apply
Off balance sheet treatment Yes, subject to conditions Yes, subject to conditions Table 2: Difference between direct assignment and pass through certificates
Typical originators and investors
The typical originators in securitization are banks, NBFCs, housing finance companies,
microfinance companies etc.
In India the key motivations to invest in securitized paper have been meeting the priority sector
lending requirements, capital relief and liquidity. However, the motivation to invest in
securitized paper for various investor classes is myriad. The investors in the market are currently
very centric and there is a need for broad basing the investors so that the motivation for
securitisation is not restricted to meeting the priority sector lending requirements for banks alone.
The investors to PTCs in India are limited to banks, NBFCs and mutual funds. Mutual funds in
the last few years have faced some litigations where investments in PTCs was considered to be
an alleged revenue leakage by the income tax department. This caused the mutual funds to stay
away from the securitization market. The Finance Act, 2013 resolved the then ongoing issues
pertaining to investments by mutual funds, but the mutual funds are yet to return to the market as
investors.
Various asset classes
Typically, any asset that produces a predictable stream of cash flows can be securitized. Though
securitization of auto loans remained the mainstay throughout the 1990s, over time, the market
has spread into several asset classes – housing loans, corporate loans, commercial mortgage
receivables, future flow, project receivables, toll revenues, etc that have been securitized.
State of Indian Securitization Market, 2016
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Major asset classes in securitization market in India have been
a. Mortgage-backed
o Residential mortgage-backed securities (RMBS)
o Commercial mortgage-backed securities (CMBS)
b. Retail Loan Pools
o Car loans
o Commercial vehicle loans
o Construction equipment loans
o Microfinance loans
o Gold Loans
o LSOs
o Credit card receivables
o Toll receipts
State of Indian Securitization Market, 2016
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Drivers for securitisation in India
One of the major drives for securitisation in India is PSL (Priority Sector Lending) targets of the
banks. Banks are mandated by RBI to have minimum exposure in identified sectors like
agriculture, MSME (micro small and medium enterprises), education, etc. The shortfall in PSL
targets of banks is being met by purchasing portfolios from NBFCs.
Securitisation as a tool is also being used for diversification of the portfolio to manage credit
exposures under various categories of assets. This helps in re-balancing and re-distributing risks
such as credit, market or liquidity risk or risk of concentrations on the balance sheet as the risks
can be bundled or hived off and distributed between various assets as per their risk appetite.
Securitisation structures come handy for inorganic growth for various entities. It provides
alternate debt instruments by which funding can be arranged over and above the balance sheet. It
frees up an originator‘s capital by removing the assets from the balance sheet and improves the
liquidity position as the future receivables are replaced by cash.
Securitisation reduces the total cost of financing as assets are transferred to a separate SPV. To
that extent FIs need not maintain capital to maintain their capital adequacy norms. Also, entities
with a riskier credit profile can benefit from lowered borrowing costs.
Securitisation also comes handy for Asset-Liability Management (ALM). Securitisation offers
the flexibility in structuring and timing cash flows to each security tranche. It provides a means
whereby customized securities can be created which helps in matching the tenure of the
liabilities and assets.
Originators’ incentives
Asset-backed securities are typically highly rated (typically can reach AAA rating as well), fully
secured and yet provides good yields. The advantages of securitisation to the investors in general
include the following:
Better security, as investors have a direct claim over a portfolio of assets;
Investment in rated structured finance products;
Rating Resilience, as securitisation investment is considered safer than corporate debt;
Flexible Instruments to serve various investment objectives;
Diversification in investment portfolio;
Fixed income security, availability of medium term and long term instrument.
For the originators – capital relief, finer pricing and tenure matched funding and alternate
fund-raising source.
State of Indian Securitization Market, 2016
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Since the prominent originators of transactions in the marketplace are banks and financial
intermediaries, the primary motives in case of banks and financial intermediaries are essentially
capital relief, profit stripping and liquidity.
Capital relief as a motive will possibly hold for NBFCs and some highly leveraged banks.
Capital relief is also a strong motive for microfinance entities. However, if capital relief was the
stronger motive, synthetic transactions would have provided a better solution. Synthetic
transactions have not emerged as yet in India.
In some securitisation transactions of gold loans, loans against properties, micro finance
receivables, personal loans, and so on, the primary motive of the originator is the ability to
leverage. Thus, liquidity beyond what is available by way of on-balance sheet sources has been a
strong motive.
Investors’ incentives
Investments in securitisation transactions mostly come from insurance companies, mutual funds
and banks. The life insurance companies particularly find the AAA rating and higher spreads
attractive. For a life insurer, the prepayment risk is a significant risk, so life insurance companies
need to maintain investments in order to make their embedded profits. Nevertheless, these
companies have been significant investors in securitisation transactions.
Investors are clearly driven by yield motives. Several prepayment protected issuances have come
up in the market recently – making it easier for fixed income and fixed maturity investors to pick
up asset backed securities.
The choice of the route, ―direct assignment‖ or ―securitisation‖ depends largely on investor
preference and such deals are customized to meet the requirements of investing entities. For
instance, while MFs can invest only in ―instruments‖, banks often prefer to acquire loan
portfolios outright, as PTCs—by virtue of being investments— would need to be marked to
market, and loans and advances do not have such requirement. Further, for the purchasing banks,
the attraction is that many of such loans qualify for the Priority Sector Lending (PSL)
requirements.
The bilateral sales typically form a part of the advances book whereas PTCs form a part of
bank‘s investment portfolio.
Volumes over the years
Securitisation volumes in India have been guided by the change in regulations and tax issues
over the years. The securitisation volumes over the five years is shown in Table 3.
State of Indian Securitization Market, 2016
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Table 3: Securitisation volumes over the five years
Source: ICRA’s estimates
The growth of the Indian securitisation market over the years has seen the crashes and the rallies
and can be attributed to the internal factors. Some of the major asset classes in securitisation
market have been car loans, commercial vehicle loans, construction equipment loans,
microfinance loans, loan sell-off (LSO) etc. Over the recent years the dynamics of the asset
classes and the volumes have changed.
As the table above clearly indicates, LSOs which was a single component of the securitisation
market in India, pre 2009 has become extinct today. The LSOs were out of favour in 2010-11 as
a fall out of the RBI‘s draft revised guidelines on securitisation. LSO was typically short term in
nature and the originators would disburse the loan with the intent to securitise them soon after
the disbursement. The introduction of the concept of Minimum Holding Period (MHP)
requirements in the 2012 Guidelines affected the LSO volumes. This coupled with the lowered
demand from mutual funds in making investments in LSOs led down to the LSO market to die in
India.
FY 2009 and 2010 were particularly bad for the securitisation industry as the volumes and
numbers of the rated securitisation transactions suffered quite a bit, as is evident from the table
above, one of the reasons was the fiasco in the microfinance industry caused due to the Andhra
Pradesh Government‘s ordinance.
In July, 2011 RBI issued a Master Circular for ‗Lending to Priority Sector2‘ whereby loans by
banks to NBFCs would not qualify as Priority Sector Lending (PSL). However investment by
2 http://rbi.org.in/scripts/NotificationUser.aspx?Id=6603&Mode=0
State of Indian Securitization Market, 2016
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banks in securitised assets representing loans to various categories of priority sector was made
eligible for classification under respective categories of priority sector, where the securitised
assets are originated by banks and financial institutions and fulfil RBI‘s guidelines on
securitisation. Post the issuance of the aforesaid master circular, bilateral assignments were on a
rise. Bilateral assignments accounted for 75% of the ABS and RMBS volumes in India.
Otherwise, the dominant classes in the securitisation market in 2011-12 were commercial
vehicles loans and construction equipment loans.
Guidelines 2012 had an impact of its own on the markets. The revised guidelines regulated both
the securitisation structures (using SPV, explained later in the chapter) and bilateral assignments.
After a brief pause in the industry, when the market was preparing itself to get attuned to the
revised guidelines, securitisation deals continued to take place. This year, however the pass-
through certificates (PTC) route dominated the market instead of bilateral assignments as the
revised guidelines prohibited credit enhancements in bilateral assignments. 2012 also saw some
spurt of activity from microfinance industry, after being in the state of limbo for couple of years,
securitisation of microfinance receivables picked up in 2012. However, the year was not great in
terms of volumes as compared to the last year. Apart from the RBI‘s revised guidelines there
were issues with regard to taxation of the SPV and some tax officers wanting to impose tax at
maximum marginal rate on the SPVs.
In FY 2013-14, the new tax regime for securitisation transactions was put in place and posed an
adverse impact on the post-tax yields of banks causing the securitisation transactions to remain
on a low key. Post the tax regime the market shifted back to doing more of bilateral assignments
than securitisation transactions. Direct assignments increased by 150% year-on-year. There was
a surge in RMBS transactions as well. FY 2014 had investors from private sector banks, public
sector banks and transactions were initiated with or without the priority sector incentives. While
the new tax regime introduced in 2013 settled the issues faced by mutual funds, they still
remained apprehensive about making investments in PTCs. Apart from these, in May, 2013, RBI
broadened the scope of limits under agriculture and MSME section of the overall PSL
classification, this enabled a lot of banks to meet greater PSL volumes of their own and reduced
dependence on securitisation for meeting the overall PSL requirements. This coupled with low
post-tax returns has also forced a lot of banks to look for alternative means of achieving PSL
requirements. While there are public sector banks that have shown interest in investing in non-
PSL securitised paper to achieve balance sheet growth, this may not have a lasting impact on the
industry in the long run.
In essence, the industry has faced quite tumultuous times in the last couple of years and each
regulatory amendment/ taxation amendment has unsettled the market players and has changed
the future course of how the industry will shape up. The intent of the regulators all through has
been to promote securitisation as a financial instrument in the country and to stimulate the capital
markets. Unfortunately for the markets the intent has not materialised in actions, on the contrary
has been acting on cross purposes more often than not.
State of Indian Securitization Market, 2016
15
In India, Commercial Vehicle (CV) is the most dominant class in asset securitization. Next,
micro loans having a 36% market share in FY 20163. In FY 2016 the number and the volume of
micro loan transactions increased by 66% and 80% respectively. 30 of the 52 Originators in ABS
space were MFIs.
The prominent asset classes for securitisation in 2016 are shown in Figure 1
Figure 1: Prominent assets classes for securitisation in 2016
Source: ICRA estimates
Innovative structures in the recent past
With growth in the securitisation market, innovative structures: CBO/CLO deals are coming up.
These deals are similar to the generic securitisation deals except in the CBO/CLO deal, the
originator bank is selling out a pool of bonds or loans held by them. Also, there could be a
difference of motivation: while for usual securitization, the stronger motivation is liquidity, in
case of CBO/CLOs, the motivation could rank from capital relief, to risk transfer, to arbitraging
profits, to balance sheet optimization, etc.
Where the originating bank transfers a pool of loans, the bonds that emerge are called
collataralised loan obligations or CLOs. Where the bank transfers a portfolio of bonds and
securitises, the resulting securitised bonds could be called collateralised bond obligations
or CBOs. A generic name given to the two is collateralised debt obligations or CDOs, as in a
number of cases, the portfolio transferred by the bank could consist of loans as well as bonds,
and at times, even ABS.
3 ICRA estimates
0 2,500 5,000 7,500 10,000 12,500
2WL & 3WL
Tractor
Others
Gold
Car & Uvs
SME
Microfin
CV & CE
Amount (in Rs. Crore)
FY 16 FY 15
State of Indian Securitization Market, 2016
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In June 2014, IFMR Capital, a non-banking finance company (NBFC) based in Chennai, had
entered into India's first collateralised bond obligation - the IFMR CBO of Rs 98 crore,
comprising multi-issuer pooled non-convertible debentures (NCDs). The IFMR CBO includes 11
issuers, all first time issuers of NCDs. The CBO issuance is a significant step towards unlocking
the potential of capital markets for such originators.
IFMR Capital has structured many multi-issuer securitization transactions (Mosec) in
microfinance and small business loans. The Mosec is a structured loan pool created by
combining loans of small and medium originators in order to create a well-diversified portfolio
of a critical size that can be taken to the market. IFMR Capital Mosec- XXII was the first listed
securitization in the country, issued in January 2013, with eight originators. IFMR Capital Mosec
Aura is so far the largest completed securitization completed by IFMR Capital -- Rs 167 crore
with four participating originators and 146,111 microloans.
State of Indian Securitization Market, 2016
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Regulatory Scenario: Securitisation
Securitisation Regulations by RBI
As mentioned earlier, India has specific guidelines on securitisation issued for banks and NBFCs
by RBI. The first set of guidelines were issued in 2006 (2006 Guidelines) and these guidelines
were revised in 2012. RBI issued the revised guidelines for banks in May 20124 and for NBFCs
in August, 20125 (2012 Guidelines).
The 2012 Guidelines were in addition to the existing 2006 Guidelines, this is to say, both the
guidelines were to be read in consonance. The 2012 Guidelines was divided into 3 parts. Part A
contained provisions on PTCs route securitisation, Part B contained provisions on DA and Part C
contains provisions on securitisation exposures that are not permitted under law.
A brief highlights on the 2012 Guidelines is as below:
a. Homogenous assets: The 2012 Guidelines make a reference to homogenous assets and
though not defined, the expression homogenous assets would mean all such assets that
share similar risk attributes would be called homogenous assets.
b. Assets eligible for securitisation: The 2012 Guidelines talk about securitisation of
performing loans. Securitisation of non-performing loans is covered by separate
guidelines. The pool of loans securitised should be homogenous in nature.
c. Assets not eligible for securitisation: Under the 2012 Guidelines the following are not
eligible assets for securitisation:
1. Single loans;
2. Revolving credit facilities;
3. Assets purchased from other entities;
4. Loans with bullet repayment of principal and interest.
d. MHP requirements: The 2012 Guidelines require the loans to be seasoned in the books
of the originator for some minimum time before they can be securitized. The intent is to
ensure that the entire risk is not passed to the investors and during the seasoning period
the portfolio would have demonstrated repayment performance to ensure better
underwriting standards. MHP shall be counted from the date of full disbursement of loans
for an activity/ purpose; acquisition of asset by the borrower or the date of completion of
a project. MHP requirements apply to individual loans, neither to borrower nor to the
pool and runs from the date of disbursement to the purchase of the assets. So all loans in
4 https://rbidocs.rbi.org.in/rdocs/content/pdfs/FIGUSE070512_I.pdf
5 https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=7517&Mode=0
State of Indian Securitization Market, 2016
18
the pool that do not comply with the MHP requirements will have to be filtered out
before the pool can be securitised.
e. MRR requirement: MRR requirements have been laid down to ensure that the
originators have continuing stake in the securitized assets so that the investors‘ interests
are not compromised at any point of time. The 2012 Guidelines states that ‗the MRR
may also include a vertical tranche of securitised paper in addition to the
equity/subordinate tranche….‘ (emphasis ours). The principles on MRR as laid down
in the 2012 Guidelines are that the first loss support must necessarily come from the
originator and the equity tranche must be held by the originator at least upto MRR.
However, the required MRR, which may be more than the needed first loss piece, need
not be an equity tranche or horizontal tranche. This gives the originator the flexibility to
invest in a combination of vertical and horizontal piece, which is called the L-shaped
structure. The first loss piece as per the Final Guidelines shall include all forms of
originator support except for IO strips and MRR shall be percentage of principal value.
The 2012 Guidelines also make it clear that the MRR shall not remain constant over the
term of the transaction, it shall amortise over the period. In case of direct assignments the
MRR should rank pari-passu with the sold portion of the assets. There is no credit
enhancement permitted in case of direct assignments at all.
f. Total Retained Exposure: The 2012 Guidelines make reference to the Basel II norms to
state that the total investment by the originator in the securities issued cannot exceed 20%
of the total securitized instruments issued. If the banks exceed the limit, the risk weight of
1111% shall be applicable on the excess amount of exposure.
g. Profit recognition and off balance sheet treatment: The 2012 Guidelines require
upfront recognition of cash profits only. The unrealised profits includes IO Strips need to
be amortised over a period of time. In case of direct assignments, the profit recognition
requirements are the same.
h. Third party credit enhancements: In case of direct assignments even a third party can
provide credit enhancements. This would bring down the cost for the originators and
increase the capital relief.
The 2012 Guidelines also intended to resolve the ambiguity that was created by the 2006
Guidelines. The 2006 Guidelines left some ambiguity on the possibility of reset of credit
enhancements as and when the securitised instruments amortised. Owing to the ambiguity it was
believed that the credit enhancements in securitisation were to be maintained at the initial levels
till the securitised paper was retired completely. Needless to say, the structures globally did not
require any reset nor was it structurally efficient to do so. As and when the securitised paper
amortised the credit enhancements as a percentage of the outstanding securities increased. In
2012, RBI clarified on the issue and set guidelines6 with regard to reset of credit enhancements
7.
6 https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8149&Mode=0
7 See our article explaining the provisions of reset of credit enhancements by Nidhi Bothra here https://www.india-
financing.com/Reset_of_credit_enhancement_guidelines_for_securitisation_transactions.pdf
State of Indian Securitization Market, 2016
19
SEBI’ Regulations pertaining to securitisation
Securities Exchange Board of India (SEBI) came out with the Securities Exchange Board of
India (Public Offering and Listing of Securitised Debt Instruments) Regulations, 20088 with
regard to making a public offer or listing of the securitised debt instruments.
The regulations states that the securitised debt instruments cannot be listed or offered to public
by any person, unless it is constituted as a special purpose vehicle, complies with the provisions
of the regulations and has all its trustees registered with SEBI.
Assignment of debt or receivables:
Regulation 10 states the conditions that need to be fulfilled with regard to assignment or true sale
of debt or receivables to the special purpose distinct entity and it being a legally realizable
assignment for the purpose of securitisation. The debt or receivables assigned to the special
purpose distinct entity identifiable stream of cashflows for servicing securitised debt instruments
that free from encumbrances and set-off and the originator has valid enforceable interest on the
assets prior to securitisation. Further the assignment of the debt or receivables happens at arm‘s
length for commercial consideration and originator obtained all necessary regulatory and
contractual consents for such assignment and adheres to all representations and warranties with
regard to receivables.
The intent of assignment of debt or receivables to a separate special purpose distinct entity is to
minimise the risk of these receivables or debt so assigned (asset pool) being consolidated with
the assets of the originator or sponsor in the event of winding up or insolvency of either of them.
Schemes of special purpose distinct entity
The special purpose distinct entity may raise funds by making an offer of securitised debt
instruments by launching one scheme or multiple schemes and the trustees shall ensure that the
realisation of the receivables are used appropriately for the redemption of the securitised debt
instruments. The terms of issuance may also have an option for clean-up call.
The schemes shall be wound up a) on full redemption of the securitised debt instruments, b)
attaining legal maturity as stated in the terms of issuance and c) vote of investors by special
resolution for the winding up of the scheme.
Credit enhancement and Liquidity facility
The terms of issuance or the offer document would state clearly about the credit enhancements of
the asset pool and the liquidity facility availed and full disclosures need to be made in the offer
document or particulars submitted to the stock exchange.
8 http://www.sebi.gov.in/acts/sdireg.pdf
State of Indian Securitization Market, 2016
20
Holding of the originator
Subject to originator acquiring securitised debt instruments on account of underwriting of public
issue or credit enhancement arrangement and appropriate disclosures made in the offer document
in this regard, Regulation 19 restricts the holding of the originator in the securitised debt
instrument to not more than 20% of the total securitised debt instruments issued in a scheme that
shall be offered to public or listed.
Offer to Public
The securitised debt instruments may be offered to public at large or any particular section of the
public. Any offer made to fifty or more persons in a financial year shall be deemed to be made to
public. The regulations also clarify that an offer shall not be considered to be public offer, if, a) it
is unlikely that directly or indirectly, the securitised debt instruments shall become available for
subscription or purchase by persons other than those receiving the offer and b) it is a domestic
concern of the persons making or receiving the offer.
Mandatory listing and rating for securitised debt instruments
Where an offer of securitised debt instruments is made to public the special purpose distinct
entity shall make an application for listing to one or more recognised stock exchanges and shall
obtain credit rating for the securitised debt instruments from atleast two registered credit rating
agencies and all such ratings obtained with regard to the securitised debt instruments shall be
disclosed in the offer document including unaccepted credit ratings.
The regulations states the role of the trustees, originator, servicer, credit rating agencies and
parties, rights of the investors, role of Board with regard to issuance of the securitised debt
instrument, the modus operandi for issuance and disclosures made to that effect.
NHB’s Regulations
The RMBS segment is regulated by National Housing Bank (NHB), a wholly owned subsidiary
of Reserve Bank of India and is mandated to regulate, supervise and provide financial support to
the housing finance companies registered with NHB. The development of secondary mortgage
market in India was dependent on the introduction of securitization and NHB played a critical
role in evolving securitization transaction to gain acceptability in the market within the existing
regulatory framework.
NHB provides for the securitization process, the primary lending institution is required to enter
into an umbrella agreement (called Memorandum of Agreement) with NHB to sell/ securitise its
State of Indian Securitization Market, 2016
21
portfolio of housing loans. The eligibility criteria set out by NHB for home loans to qualify for
securitization are as below:
The home loans should satisfy the following standards for being considered for selection in the
Mortgage Pool offered for securitization:
a. The borrower should be individual(s).
b. The home loans should be current at the time of selection/securitization.
c. The home loans should have a minimum seasoning of 12 months (excluding moratorium
period).
d. The Maximum Loan to Value (LTV) Ratio permissible is 85%. Housing loans originally
sanctioned with an LTV of more than 85% but where the present outstanding is within 85% of
the value of the security, will be eligible.
e. The Maximum Instalment to (EMI) to Gross Income ratio permissible is 45%.
f. The loan should not have overdues outstanding for more than three months, at any time
throughout the period of the loan.
g. The Quantum of Principal Outstanding Loan size should be in the range of Rs.0.50 lakh to
Rs.100 lakhs.
h. The pool of housing loans may comprise of fixed and/or variable interest rates.
i. The Borrowers have only one loan contract with the Primary Lending Institution (PLI).
j. The loans should be free from any encumbrances/charge on the date of
selection/securitization. The sole exception to this norm being loans refinanced by NHB (In
such cases, the loans may be securitised subject to the originator substituting the same with
other eligible housing loans conforming with the provisions of the refinance schemes of
NHB).
k. The Loan Agreement in each of the individual housing loans, should have been duly executed
and the security in respect thereof duly created by the borrower in favour of the PLI and all
the documents should be legally valid and enforceable in accordance with the terms thereof.
l. The Bank/HFC has with respect to each of the housing loans valid and enforceable mortgage
in the land/building/dwelling unit securing such housing loan and have full and absolute right
to transfer and assign the same to NHB.
The transactions are typically such that the originator, servicer and loan administrator is an HFC
or bank, NHB sets up the special purpose vehicle (SPV) and acts as a trustee to the transaction.
State of Indian Securitization Market, 2016
22
The HFC/ bank assigns the retail housing loan pool to NHB SPV and the SPV in turn issues
certificates called Pass through certificates (PTCs) to the investors that are institutional investors
including Insurance Companies, Mutual Funds, Financial Institutions, and Commercial Banks.
The PTCs are in the nature of trust certificates and represent proportionate undivided beneficial
interest in the pool of housing loans. PTCs again are issued in tranches of Class A and Class B.
While Class A tranche PTCs are subscribed by the investors, Class B, the subordinated class is
retained by the originator as the first loss piece, which means it acts like a credit enhancement for
Class A investors to attain AAA rating.
NHB placed its first mortgage backed securitization transaction before the capital markets in
2000 and has so far launched ten issues of RMBS with total loan size of Rs.665 crore9.
RMBS was a major asset class in early years of securitisation. It almost completely disappeared
in 2007 and 2008. In 2009 and 2010, there seems to be a revival of the RMBS market. Reasons
for absence of RMBS transactions are very difficult to understand, except that the mortgage
market is dominated partly by banks and partly by a few large housing finance companies.
RMBS issuances have a very narrow base of investors and originators. Banks do not have
reasons to sell their housing loan portfolios; larger mortgage originators have significant liquidity
alternatives, and therefore, may not have the motivation to securitise. RMBS had been on a low
key till 2011 and the market composition in terms of number of originators remained highly
skewed in this segment; in the financial year 2013-14 however, the number of RMBS
transactions tripled to 30 in numbers from 10 in 2012-13 while the average deal size became
smaller.
9 Last visited on 4
th August, 2014
State of Indian Securitization Market, 2016
23
Tax Issues: Securitisation
Introduction of distribution tax
Finance Bill 2013, introduced Chapter XII EA in the Income Tax Act, 1961 pursuant to the
provisions of which, the income distributed by the securitisation trusts would be subject to
distribution tax at the rates specified in Section 115 TA of the Income Tax Act, 1961. Income
received by the investors would be exempt from tax in the hands of the investors.
The Finance Bill, 2016 has proposed amendments pertaining to taxation of securitisation trusts
whereby:
distribution tax payable by the securitisation trusts on distribution of income to investors
and corresponding exemption in the hands of the investors as provided for in section
115TA shall not be applicable for income distributed by the trust to its investors on or
after 1st June, 2016.
any income out of investments made in the securitisation trust, shall be chargeable to
income-tax in the hands of receiver of the income as if it were the income out of
investments made directly by him (Section 115TCA).
income payable to a resident investor by a securitisation trust shall be subject to tax
deduction at source at the prescribed rate (Section 194LBC).
Pass-through status to securitisation trusts
The Union Budget, 2016 has allowed complete pass through of income tax to securitization
trusts and replaced the distribution tax with tax deducted at source. The change in the tax
provisions were much awaited by the industry and hopefully will bring back the PTCs
transactions allowing the markets to grow beyond direct assignments.
As an annexure to the budgetary speech, the Finance Minister seems to have permitted foreign
portfolio investors (FPIs) to invest in securitization vehicles. So far, FPIs were permitted to
invest in security receipts issued by ARCs, but not in securitization transactions. However
appropriate provisions have to be inserted in the FPI regulations for the proposed amendment to
take effect.
Exemption for TDS
State of Indian Securitization Market, 2016
24
The CBDT vide notification no No. 46 /201610
, dated 17th June and exempted all payments
made to a securitisation trust (read, securitisation SPV) from deduction of tax at source. The
relevant extract of the notification is as under –
“no deduction of tax under Chapter XVII of the said Act shall be made on the payments
of the nature specified in clause (23DA) of section 10 of the said Act received by any
securitisation trust as defined in clause (d) of the Explanation to section 115TC of the
said Act.”
The said notification will be effective from 17th June, 2016. Hence, there will be no TDS on
payments made to a securitisation SPV, qualifying in terms of sections 115TA-115TC, read with
115TCA of the Income Tax Act, 1961 (―IT Act‖).
Securitisation trust has been defined in clause (d) of the explanation below section 115TCA. The
same has been reproduced as under –
“Securitisation trust” means a trust, being a –
i) "special purpose distinct entity" as defined in clause (u) of sub-regulation (1) of
regulation 2 of the Securities and Exchange Board of India (Public Offer and
Listing of Securitized Debt Instruments) Regulations, 2008 made under the
Securities and Exchange Board of India Act, 1992 (15 of 1992) and the Securities
Contracts (Regulation) Act, 1956 (42 of 1956), and regulated under the said
regulations; or
ii) "Special Purpose Vehicle" as defined in, and regulated by, the guidelines on
securitisation of standard assets issued by the Reserve Bank of India,
iii) trust set-up by a securitisation company or a reconstruction company formed, for
the purposes of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, or in pursuance of any guidelines or
directions issued for the said purposes by the Reserve Bank of India,
which fulfils such conditions, as may be prescribed
The notification specifies that no deduction shall be made on the payments of the nature
specified in clause (23DA) of section 10 of the Income Tax Act, 1961 (IT Act). Section 10
(23DA) provides that ―any income of a securitisation trust from the activity of securitization‖
shall be exempted from income tax. As all the income payable to a securitization trust are
covered by section 10 (23DA), consequently any payment made to a securitization trust will
remain exempted from requirement of deduction of tax at source as required by the provisions of
chapter XVII of the IT Act.
10
http://www.incometaxindia.gov.in/communications/notification/notification462016.pdf
State of Indian Securitization Market, 2016
25
As a consequence to the notification, even if the original loan transaction was liable to TDS,
once it gets securitized, the borrower will no longer be liable to deduct tax at source. The entire
cashflow inefficiency therefore, gets removed. On the contrary, securitised loan cashflow may be
more efficient than original loan cashflows. Cash which was getting blocked in TDS gets
released immediately. The originator will stand to be biggest beneficiary, since on securitsation,
the originator gets the present value of what was earlier blocked in TDS.
FPIs investment in ABS
In the Union Budget of 2016-17, the Finance Minister confirmed that FPIs will be permitted to
invest in securitised debt instruments. This announcement was followed by a draft circular11
from RBI in May 2016 whereby FPIs will be allowed to invest in any certificate or instrument
issued by a special purpose vehicle set up for securitisation of assets originated by banks, FIs or
NBFCs as per the RBI directions of 2006 or any certificate or instrument issued or listed in terms
of SEBI ―Regulations on Public Offer and Listing of Securitised Debt Instruments, 2008. The
final guidelines in this regard are yet to come.
PSLC guidelines impacting securitisation demand
The concept of PSLC was recently coined by RBI in the notification on Priority Sector Lending
– Targets and Classifications12
dated 23rd
April, 2015 whereby it was indicated that banks could
buy and sell PLSC and the same would be considered eligible for the priority sector lending
(PSL) targets. The Government of India had later vide notification dated 4th
February, 2016
specified that dealing in PSLCs in accordance with the RBI guidelines will be a permitted
banking activity under Section 6 (1)(o) of the Banking Regulation Act, 1949.
In pursuance to this, RBI notified guidelines on PSLCs13
on 7th
April, 2016. The guidelines
prescribed by RBI are in lines with the recommendations of the IWG.
PSLCs are certificates representing a certain denomination, providing credit to the holder of
instrument under the PSL requirements to the extent of the issue size.
The mechanics of PSLCs will work as below:
a. There are certain banks which are PSL positive (that is, they have originated more
than their required levels of PSL). There are certain banks that are PSL negative (that
is, they have originated less than their required levels of PSL).
b. Currently, there is a lot of trade (direct assignment or securitization) that happens for
squaring off mutual PSL positions. That is to say, PSL-positive banks sell their
11
https://rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3173 12
https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=9688&Mode=0 13
https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10339&Mode=0
State of Indian Securitization Market, 2016
26
portfolios/ PTCs to PSL-negative banks. If the trade is happening merely to meet
PSL targets, the RBI‘s trading mechanism in trading in entitlements of PSL works
very well.
c. The PSLC trading mechanism provides that these banks may trade and square off
their position as PSL lenders (that is, positive and negative positions) without any
actual trade in the underlying loans themselves. That is to say, the loans, the
underlying cashflows and the income/ risk from the loans remain with their
respective originators. There is no trading in the loans at all. The mere eligibility/
requirement for PSL is getting traded among the banks.
d. Therefore, a PSLC is a mere eligibility to get credit points for PSL. It is neither
actual nor synthetic securitization of the underlying loans.
e. The requirement of PSL in India is primarily intended to ensure financial inclusion.
As the inclusion target is being fulfilled in the banking system, whether a particular
bank fails to achieve the target or not, the objective of financial inclusion is still
being filled.
The RBI notification provides that banks can issue PSLCs. Scheduled Commercial Banks
(SCBs), Regional Rural Banks (RRBs), Local Area Banks (LABs), Small Finance Banks (when
they become operational) and Urban Co-operative Banks may issue PSLCs as per regulations
issued by RBI. The PSL targets are applicable to banks only, the eligible issuers are also banks
alone. NBFCs cannot issue PSLCs.
State of Indian Securitization Market, 2016
27
Future outlook
The recent changes on the taxation side is sure to have a positive impact on the securitisation
market coupled with the FPIs permissibility in investing in securitised debt instruments will
propel the growth of the securitisation transactions in India.
Distribution tax being replaced by pass-through status for securitization trusts will allow
tax neutrality to prevail.
The permissibility for FPIs to invest in securitized debt instruments will broad base the
investors in PTCs.
The current trends in securitization are indicating that the market is trying to grow
beyond the priority sector requirements. There are several public sector banks that are
purchasing loan portfolios for inorganic growth in the loan books. Also the regulations
allowing priority sector lending certificates may have an impact on the demand for
securitization.
The NBFCs, be they Asset Finance Companies specialising in SME financing or
transport financing, or be they MFIs or Housing Finance Companies (HFC), their USP is
their capacity to originate loans and advances in sectors where the main stream banks
have least penetration. They have comparative advantage and to leverage that they will
have good opportunities in resorting to securitisation.
The new set of differentiated banks, the Small Finance Banks, whose major portfolio will
be small loans, will resort to securitisation for diversifying their balance sheet. In all
likelihood, they are unlikely to build capacity in large sized lending and will resort to
build diversified portfolio of large credit through securitisation.
In essence with the regulatory and taxation issues being ironed out, the future outlook of
securitisation in India looks positive.
State of Indian Securitization Market, 2016
28
Global Scenario
Post the 2008 crisis, the securitization market globally had been dead; investors‘ confidence
eroded and securitization was tagged as too complex for market players. The regulators/
international organisations soon realized that the revival of securitization market was
quintessential for the revival of the economies globally. To this end and intent, several
regulations were recast to restart the securitization market globally including the Dodd Frank Act
which ran into 900 pages; several committees propagated the idea of re-starting simple and
transparent securitization transactions.
In 2013-14 there was a substantial pick-up in the investors‘ interest and the momentum
continued both in terms of volumes and credit performance. Even though the market is
recovering, a lot of securitization was affected by the recession in European countries and
turbulence in China‘s financial system and the growth is largely dependent on the economic and
regulatory specific to the country. Table 4 shows the issuance volumes over the past few years
in different countries developments.
Historical Issuance €
Billion
Year Europe US Australia
2001 152.6 2,308.4 15.5
2002 157.7 2,592.7 19.4
2003 217.3 2,914.5 24.9
2004 243.5 1,956.6 31.7
2005 327.0 2,650.6 31.5
2006 481.0 2,455.8 36.8
2007 593.6 1,253.7 34.3
2008 819.2 915.8 6.6
2009 423.8 1,351.9 9.7
2010 379.1 1,170.1 15.5
2011 375.9 1,031.2 20.4
2012 253.2 1,554.7 14.8
2013 180.2 1,495.7 22.4
2014 216.3 1,070.3 22.1
2015 213.8 1620.7 19.9
2016 56.9 308.9 2.9
Table 4: Historical data on the issuance of securitisation securities
Source: AFME Securitisation Data Report, Q1:2016
State of Indian Securitization Market, 2016
29
Such volumes have been derived after taking into consideration various issuances under different
asset classes such as asset-backed securities (ABS), collateralised debt obligations/ collateralised
loan obligations (CDOs/CLOs), commercial mortgage-backed securities (CMBS), and residential
mortgage-back securities (RMBS).
Recent Securitisation Structures
Fannie Mae and Freddie Mac Credit Risk Transfer Transactions
Federal Housing Finance Agency (FHFA) had introduced a plan14
in the year 2012 to develop a
program of credit risk transfer. The idea behind the plan was to lessen Fannie Mae‘s and Freddie
Mac‘s (Enterprises) overall risks. It is noteworthy that in just 3 years the Enterprises have turned
the plan into a well-functioning market, which is apparent from the substantial amount of credit
risk already transferred by them. Following chart shows the credit risk transfer transactions
undertaken by the Enterprises in the past 3 years:
Figure: Credit Risk Transfer Transactions
Source: Federal housing finance Agency15
Under credit risk transfer transactions, the Enterprises purchase single-family mortgage loans
from various lenders, namely companies, commercial banks, credit unions and other financial
institutions and issue mortgage-backed securities (MBS) backed by such loans. These loans have
typically two types of risk inherent in them, one is interest risk and the other is credit risk.
Interest risk are passed on to the investors through sale of MBS whereas Enterprises have come
14
http://www.fhfa.gov/AboutUs/Reports/ReportDocuments/20120221_StrategicPlanConservatorships_508.pdf 15
http://www.fhfa.gov/ABOUTUS/REPORTS/REPORTDOCUMENTS/CRT-OVERVIEW-8-21-2015.PDF
State of Indian Securitization Market, 2016
30
up with various ways through which they handle credit risk. One of which is credit enhancement
by way of mortgage insurance and borrower equity and the other is charging of a guarantee fee
from the investors beyond the credit enhancement provided by borrower equity and mortgage
insurance, pursuant to which the Enterprises guarantee the timely repayment of principal and
interest on the MBS. The quantum of guarantee fee is such that it covers the expected credit
losses resulting from the borrower defaults over the life of the loans and other administrative
costs including the cost for holding the capital required to cover credit losses expected during
adverse economic conditions.
In other words, it can be said that these transaction mainly transfer the credit risks to the
investors, since by paying the guarantee fee the investors bear a part of the credit losses. Mainly
these transfers have been focused on transferring expected (which is likely to occur) and
unexpected (over and above the expected losses mainly due to adverse macroeconomic
conditions) losses. The protection of mortgage credit losses post credit enhancement is the
responsibility of the Enterprises and is covered by the guarantee fee.
Recently in 2015, Fannie Mae completed its final credit risk-sharing transaction16
as part of its
Credit Insurance Risk Transfer program and is expected to come out with more such programs in
the coming years.
Peer to peer lending securitization – U.S.
P2P lending, a business where an online platform matches lenders with borrowers so that the
lender is able to provide loan to the borrower at an interest rate set by the platform, is in vogue
now. Even though the P2P loans represent only 0.08% of the $96 trillion17
global corporate and
household outstanding debt, in the U.S., P2P lending has been growing manifold and is expected
to have reached $77 billion in FY 15 which is 15 times the volume recorded three years ago.
Lending Club, Prosper etc are some of the famous P2P platforms in the U.S.
Interestingly the U.S. is now securitizing the loans originated through the P2P model. The first
instance of such transaction dates back to the year 2013, when Eaglewood Capital, a hedge fund,
securitised some of the loans belonging to Lending Club, wherein bonds, backed by such loans,
were issued to investors18
. It managed to raise $53 million wherein Eaglewood was itself
exposed to a risk of $13 million. Cashflows collected from such loans were used to repay the
principal and interest component of the bonds.
Another such instance was $327m deal, known by the name ‗Consumer Credit Origination Loan
Trust 2015-1‘, originated by BlackRock Financial Management and rated by Moodys‘19
, wherein
bonds were backed by the loans belonging to Prosper. Further, Social Finance Inc. (SoFi) had
also received an investment-grade rating from Standard & Poor‘s for a securitisation of P2P
student loans. Also, Jefferies, a global investment banking firm, had recently completed a $106
16
http://www.fanniemae.com/portal/about-us/media/financial-news/2015/6329.html 17
https://www.cpacanada.ca/en/connecting-and-news/cpa-magazine/articles/2015/august/lending-2-0 18
http://dealbook.nytimes.com/2013/10/01/a-step-toward-peer-to-peer-lending-securitisation/?_r=0 19
http://www.ft.com/intl/cms/s/0/a22edbe0-a749-11e4-b6bd-00144feab7de.html#axzz3wH9irLrk
State of Indian Securitization Market, 2016
31
million securitisation deal which was backed by of P2P loans originated through CircleBack
Lending20
. Given the latest securitisation deals backed by P2P loans, it is evident that investors
are keen on investing into notes backed by P2P loans.
Securitisation will enable P2P loans to be tapped by a larger investor base and will also increase
the liquidity of the asset class, therefore it is obvious that that P2P lenders will use this mode to
increase their loan book. The real threat lies with the investors since they will be investing in an
asset class which has a limited performance history, lack of any stringent regulatory requirement
and also the originators of the loan do not have any direct monetary interest in the performance
of the asset pool since they are not the sponsors of the transaction. It can be said that P2P loan
securitisation is still in its nascent stage and ne will have to wait to witness its success or failure.
Alibaba’s microloan securitisation-China’s first
The Alibaba plan is China‘s first securitisation of microloans. Even though securitisation of
small and medium loans have taken place earlier, the Alibaba plan is noteworthy since its
underlying assets comprise of loans to microenterprises and sole proprietors21
.
There was point during the year 2012, when approximately 11.3 million companies had
registered themselves on Alibaba.com. The major challenge faced by Alibaba was to meet the
funding demand of these companies. Given that there are restrictions on the leverage for micro
lending companies imposed by China Banking Regulatory Commission (CBRC) and People‘s
Bank of China's Guidance on Microloan Companies‘ Pilot Operations in China, securitisation
seemed like a logical way to address the issue.
Recently in December 2014, Ant Micro Loan, an affiliate of Alibaba Group became one of the
first small loan lenders approved by the China Insurance Regulatory Commission (CIRC) to
issue asset-backed securities (ABS) backed by micro loans.
In this regard, Georgina Lee, Moody's Assistant Vice President and Research Writer22
said:
"The Ant Micro Loan deal highlights that securitisation can help fund micro loan
lenders' activities, and also be an important funding avenue for such groups with
ambitions to grow their internet finance business and expand into wider banking
services,"
20
http://www.crowdfundinsider.com/2015/06/70411-circleback-securitizes-106-million-as-marketplace-lending-
grows/
21
http://ajw.asahi.com/article/views/opinion/AJ201310230045 22
https://www.moodys.com/research/Moodys-Securitisation-can-help-fund-Chinese-SME-lenders-and-internet--
PR_323875
State of Indian Securitization Market, 2016
32
Dunkin’ Brands $2.6Billion whole-business securitisation
On 26th January 2015, Dunkin' Brands Group, Inc., the parent company of Dunkin' Donuts and
Baskin-Robbins, had completed refinancing its senior secured credit facilities with a new
securitised financing facility.23
24
It had announced its intention to refinance its senior secured
credit facility on 6th January, 2015.
In 2006 Dunkin' Brands had executed a similar financing facility25
. It had raised $1.7 billion by
securitizing royalty from its franchise in fast food chains Dunkin' Donuts, Baskin-Robbins and
Togo's. The triple-A rated offer included $1.5 billion in senior notes backed by Ambac
Assurance. The money raised was used in the $2.4 billion acquisition of Dunkin' Brands by a
group of three private equity firms, the Carlyle Group, Thomas H Lee Partners and Bain Capital.
The Dunkin' deal was the first time a buyer had securitised franchise royalty payments,
intellectual property, leases and other licensing receivables. The securitisation of the royalty
payments of franchises for acquisition of Dunkin' Brands deal was as close to a whole business
securitisation as is possible under U.S. law.
Apart from Dunkin‘ Brands $1.7 billion franchise royalty securitisation in 2006, $1.8 billion
Sears Holdings transaction in 2007, and deals from Applebee‘s and IHOP in 2007 were also one
of the biggest intellectual property securitisation.
Solar securitization
With the increasing growth in demand for solar power instruments, the instrument providers are
now on a look out for alternate financing options, which has opened up securitisation as an
obvious choice. Typically in securitisation in solar context would mean aggregating pool of cash
flows arising from solar instruments financed by home-owners and businesses and issuing
securities backed by these revenue streams either on public offering or private placement. Some
of the obvious benefits that developers see in securitisation is access to more funds through
capital markets and at a lower cost26
, which has been the forte of securitisation always.
Securitisation also allows developers to broad base the investors from existing bank lenders and
tax equity investors incentivized by the current regulatory benefits offered in investment in solar
sector. From investors‘ perspective, solar securitisation as an asset class looks appealing as there
is diversification of underlying asset risks due to geographical diversification possible in the
solar sector.27
23
http://www.providencejournal.com/business/press-releases/20150126-dunkin-brands-completes-2.6-billion-
securitisation-refinancing.ece 24
For more details please click here 25
https://www.moodys.com/research/MOODYS-RATES-DUNKIN-BRANDS-FRANCHISE-ROYALTY-FEE-
SECURITISATION-Aaa--PR_114174 26
As per National Renewable Energy Laboratory‘s (NREL) study, securitisation could lower the levelized cost of
energy (LCOE) of best-quality solar projects up to 16%. 27
For more details click here
State of Indian Securitization Market, 2016
33
Recently, SolarCity has completed its fourth successful securitisation wherein bonds were
backed by solar assets28
. The company had come up with its first securitisation in November,
2013 amounting to US$54 million. This was considered as a breakthrough in lowering the cost of
capital for the solar industry. Also, recently AES Corp., a U.S. power producer, is in the news
since it is planning to securitize its first portfolio of solar projects.29
28
http://www.pv-magazine.com/news/details/beitrag/solarcity-completes-its-fourth-
securitisation_100020603/#axzz3wMbS6Hq7 29
http://www.bloomberg.com/news/articles/2015-09-28/aes-planning-100-million-u-s-solar-power-securitisation
State of Indian Securitization Market, 2016
34
Recent Regulatory Changes
1. Criteria for identifying simple, transparent and comparable securitisation: The Basel
Committee on Banking Supervision (BSBS) and the Board of the International Organisation
of Security Commissions (IOSCO) had set up a joint task force to review the developments
in the securitisation market, identify factors hindering development of sustainable
securitisation market and also identify criteria for development of simple and transparent
securitisation structures. Based on the observations of the Task Force on Securitisation
Markets (TSFM), BSBS and IOSCO have developed 14 criteria30
for simple, transparent and
comparable securitisation which was issued by way of a consultative document31
on Criteria
for identifying transparent and comparable securitisation on 11th December, 2014. The
consultative paper clearly mentioned that the focus of STC securitisation is towards term
securitisation and not short term securitisation. Further the final criteria based on the
feedback from various stakeholder had been issued in July, 201532
.
2. Key changes proposed in European Securitisation Rules: In September 2015, the
European Parliament and Council has proposed regulations33
framed with the motive to
harmonize rules on risk retention, due diligence and disclosure across different categories of
European institutional investors who are currently governed by separate regulations.
Securitisation will also come under the ambit of the proposed regulation, subject to
grandfathering provisions and will provide a new framework for simple, transparent and
standardized (STS) securitisation. Even though the STS securitisation framework is similar to
the simple, transparent, and comparable (―STC‖) securitisation criteria proposed in July 2015
by BSBS and IOSCO, the STS criteria are proposed as European Union law. 34
30
For more details click here 31
http://www.iosco.org/library/pubdocs/pdf/IOSCOPD467.pdf 32
http://www.bis.org/bcbs/publ/d332.pdf 33
http://www.lexology.com/library/detail.aspx?g=0811719a-3085-4ff0-bda9-12e6f88a4141 34
For more details click here
State of Indian Securitization Market, 2016
35
State of Global Securitisation Market
United States of America The U.S. securitization market continues to be the largest market for securitization, globally.
Generically there is a revival across ABS, MBS and CLOs in the U.S. Auto and credit card
securitization has recovered strongly. There is growth in MBS market but the non-agency RMBS
market has remained a fraction of its former self.
The growth is attributable to the clarity on regulations relating to securitization. In the U.S.,
securitization transactions falls within the ambit of the Dodd-Frank Act and are also partly
governed by Basel III capital requirements. The volume of ABS (Figure 2), CMO (Figure 4),
CMBS(Figure 5), MBS(Figure 3) and Non-agency RMBS(Figure 6) issuance in the last 20 years.
Figure 2: The volume of Asset-backed securities issued in last 20 years
Source: Statistics Research by Sifma
12
0.4
12
2.6 14
6.7
14
4.3 1
90
.2
20
5.4
21
5.6
23
1.2
22
2.7
28
9.1
26
8.2
28
9.0
26
8.6
15
1.8
10
6.6
12
4.1
20
1.1
18
8.9 2
25
.4
19
3.2
40
.8
VO
LUM
EES
IN (
$B
ILLI
ON
)
VOLUMES OF US ABS ISSUANCE
Volumes
State of Indian Securitization Market, 2016
36
Source: Statistics Research by Sifma
Figure 4: The volume of issuance of CMO securities in last 20 years
76
.1
18
0.1 23
2.9
20
7.9
10
8.9
39
4.2
59
7.5
62
6.5
37
8.0
36
4.4
31
6.0
27
6.6
19
7.1
28
8.7
50
0.0
38
9.9
32
5.1
31
1.1
21
1.6
19
0.3
28
5.5
VO
LUM
ES IN
($
BLL
.)
VOLUME OF US CMO ISSUANCE
Volume
36
7.9
36
4.4
72
2.0
67
9.3
47
4.4
1,0
86
.2 1,4
46
.8
2,1
30
.7
1,0
15
.0
98
3.3
92
3.1 1
,18
9.0
1,1
69
.7
1,7
34
.2
1,4
19
.9
1,2
40
.1
1,7
56
.9
1,6
42
.7
98
0.0
1,3
22
.5
28
5.5VO
LUM
ES IN
($
BLL
.)
VOLUME OF US MBS ISSUANCE
Volume
Figure 3: The volume of mortgage-backed securities in the last 20 years in US
State of Indian Securitization Market, 2016
37
Source: Statistics Research by Sifma
Figure 5: The volume of CMBS issuance in the last 20 years
Source: Statistics Research by Sifma
12
.8
14
.0
66
.1
48
.4
43
.9 63
.7
50
.0
72
.3 93
.5
15
7.2 1
84
.1
22
9.6
16
.9
5.3 1
3.5 3
1.1 45
.0
87
.0 99
.4
10
0.5
40
.8
VO
LUM
ES IN
($
BLL
.)
VOLUME OF US CMBS ISSUANCE
Volume
State of Indian Securitization Market, 2016
38
Figure 6: The volume of US Non-Agency RMBS issuance in the last 20 years
Source: Statistics Research by Sifma
Europe
Economic growth continues to be weak in the European countries and the securitisation levels
have fallen to third of pre-crisis levels. A lot of securitization in Europe is supported by
regulators. There has been a tangible support for structured finance in the form of central bank
purchase programs. European central banks have purchased covered bonds and asset backed
securities to support the structured finance market in Europe. The program for purchase of asset
backed securities has not done well as there have been very few securitization transactions
limiting the opportunities for purchases. Also the risk retention requirements have been dis-
incentivising issuers and investors. Also Europe has covered bonds for funding mortgages which
are secured against the banks as also against the receivables. The prospects of growth of
securitization in EU will depend on how the regulatory regimes in the countries deal with
securitization. Some of EU members met recently to consider regulatory mechanisms to revive
the securitization market and create a capital markets union in the Eurozone.
During the first quarter of the year 2016 issuance of securitised product in Europe fell to EUR
56.9 billion as against EUR 71.4 billion in last quarter of 2015, however the same has increased
by 61.2% when compared to the volume of issuance in the first quarter of 2015. However,
investor-placed issuance volumes was EUR 14.3 billion, representing 25.1 % of issuance,
compared to EUR 15.6 billion placed in last quarter of 2015 (representing 21.8%) and EUR 19.7
billion placed in first quarter of 2015 (representing 55.8%). Table 5: Volume of placed issuance
of securitised products shows the placed issuance volume.
48
.4
64
.7
14
1.4
10
6.1
69
.0
15
6.4 2
48
.2
34
3.5 4
30
.4
72
6.4
68
6.1
50
7.2
27
.9
0.9 1.7 10
.9
3.5 14
.3
9.8 18
.7
1
VO
LUM
ES IN
($
BLL
.)
VOLUME OF US NON-AGENCY RMBS ISSUANCE
Volume
State of Indian Securitization Market, 2016
39
Table 5: Volume of placed issuance of securitised products
Source: AFME Securitization Data Report, Q1:2016
Asia
The Asia-Pacific securitization market has been promising in the recent times and continues to
show a trend of development. There has been a growth in the Asian market‘s share in the global
volumes, however a part of that is attributable to fall in the European market‘s share of
securitisation volumes as well. The collateral performance in the Asian countries has been strong
despite the evident economic downturns. The Australian markets also continued to grow year on
year. The issuers have been widespread and investors have been both onshore and offshore. As
per a report of BIS35
, Consumer ABS volumes have recovered to above their pre-crisis peaks,
however RMBS remains less than half its peak level and CMBS issuance has been dormant. In
the past few years, the Japanese securitization market has been on a low key. Japan‘s
securitization annual issuances have fallen to a third of the 2006 levels.
China
Securitization in China started with a pilot program in 2005 allowing banks to securitise the
loans. The 2008 crisis shelved the pilot program but the same was later restarted in 2012. China‘s
securitization market has had a great upswing with RMB 210 billion or 300 billion Yuan worth
of asset securitization which is twice the aggregate issuance volumes of 2005 and 2013 put
35
http://www.bis.org/bcbs/publ/d304.pdf
State of Indian Securitization Market, 2016
40
together. The Chinese market may continue to grow considering the regulatory impetus and
despite the signs of economic slowdown. The Chinese market is still in its nascent stage and
needs constant regulatory monitoring to ensure that risks and rewards of securitization are
maintained. The regulators have recently banned asset management companies from
securitization of local government debts. China‘s local governments have massive debt for
infrastructure development and China‘s cabinet has announced that it would not bail out the local
government in case they were to fail to pay their debt. China‘s securitization market despite
being in the nascent stage is fast growing. The securitization surge in China has seen a quantum
jump in the first eight months of 2015 from $20.8 billion to $26.3 billion in the same period last
year36
making it Asia‘s largest securitization market, leaving behind Japan and Korea. The
jumbo value transactions in China have been that of government authorities largely. Figure 7
below indicates China overtaking South Korea in securitization transactions in terms of deal
values.
Figure 7: Securitisation China & South Korea
Source: Dealogic
The massive development of the securitisation market of China is due the regulations set forward
by two apex bodies, the China Banking Regulation Commission and The People‘s Bank of
China. The regulatory efforts which changed the face of Chinese securitisation in the year 2015
were the deal registration scheme, the inclusion of market organizations in deciding on deal
feasibility and industry governance requirements and an ongoing demand for information
disclosure. These regulatory reforms have widened the range of issuers to tap in the market and
has also helped shape market operations on information sharing and data analytics, which was a
bottleneck for investors to subscribe to the issues of the securitised products. China looks
forward to re-boost its economy by freeing up funds of the banks, which will allow them to
advance new loans in the country‘s economy.
36
http://www.wsj.com/articles/china-becomes-asias-biggest-securitisation-market-1443082192
