The Indian securitisation market continues its headlong growth. As the deals grow bigger, issuers and arrangers are getting bolder and investors are enjoying a better quality of product. Mark B Johnson reports.
Like the indian economy, the securitisation market is thriving. As middle class Indians become more prosperous, they are also being tempted to borrow more, generating a boom in consumer finance and residential mortgages. An increasing proportion of these assets are finding their way into the ABS market, channelled by leading issuers such as ICICI Bank.
Indian securitisation more than doubled to Rp308bn ($7bn) during the fiscal year to March 31, 2005, according to ICRA India, an associate company of Moody's and the authoritative local rating agency.
Nithya Easwaran is vice president at Citibank, the most prolific arranger of securitisations in India. She says that ABS now make up more than 45% of corporate bond issues, which ICRA estimated at around Rp667bn in 2004-05.
Asset backed deals are getting bigger and issuers are tapping the market more frequently.
The ICRA report's authors, Kalpesh Gada and Rohit Inamdar, note that while total issuance grew by 121%, the number of deals increased only by 41%, so that the average ABS deal size almost doubled from Rp1.5bn in fiscal 2004 to Rp2.9bn ($66m). This increase was caused mainly by the large pools securitised by leading vehicle financiers such as ICICI Bank and HDFC Bank.
The Indian structured finance market dates back to 1991, but in its present form it began around 2000 and burst into life in fiscal year 2003-4. Driven by the growth in consumer finance, this expansion has been possible thanks to investors' growing familiarity with the underlying asset types, especially vehicle, equipment and personal loans, backed up by a body of collections data showing that previous deals have performed well.
Indian investors largely prefer triple-A securities, and much of the structural innovation in the past year has gone into fashioning tranches with more predictable amortisation profiles to make the paper more akin to plan vanilla corporate bonds. The most common methods include time tranching the deal into as many as 16 tranches, maturing in succession, and the planned amortisation class (Pac).
"Most issuance is tranched nowadays into different classes," Easwaran explains, "but this is aimed not at moving down the credit spectrum but at giving investors a variety of maturities that suit their requirements and in order to involve as much of the market as possible in the transactions."
Pac tranches have scheduled amortisation, with volatility in prepayments soaked up by a companion bond.
Investors have also demanded more floating rate deals. "We have seen an increase in floating rate paper," Easwaran says. "As rates have become more volatile and have edged upwards, investors are looking for more protection."
Rohit Inamdar, ICRA's head of structured finance ratings, says around 13% of deals in 2004-5 had floating rate yields, compared with 6% the year before.
The pricing premium above corporate paper remains at roughly 30bp-50bp, depending on the underlying pools. "That might trend tighter once ABS paper is listed," says Easwaran, "which is certainly on the cards due to pending regulatory changes for designating passthrough certificates as securities under the Indian securities legislation."
Both prepayment protection structures and floating rate issues are made easier by the trend of pricing deals at par, rather than the traditional premium pricing. Par deals accounted for 40% of issuance in 2004-5, according to ICRA.
The other major structural development is the rise of a new technique, in which retail loans are directly assigned to an investor, rather than put into a special purpose vehicle that issues securities.
"Banks are buying ABS directly into their loan books, bypassing the need for SPVs," Easwaran explains. "The deals are still rated and the collateral is the same, but they meet the demand for loan assets which is very high from banks and also avoid the buyers needing to mark to market."
Citibank is working on a transaction that incorporates both certificates issued by an SPV and direct assignment to investors. The structure caters both to mutual fund investors and banks.
Government weighs in
Citigroup used this method to arrange an innovative securitisation for Indian Railways Finance Corp, which supplies rolling stock on finance lease to the Ministry of Railways. Government lease receivables covering specifically identified rolling stock financed in the 2000-01 financial year were directly assigned to investors. The $44m equivalent deal has a legal final maturity of 10 years and a weighted average life of five years.
"This is the first time a government entity has securitised assets, and it was therefore a landmark transaction," says Easwaran. "The client wanted to diversify funding sources beyond plain vanilla domestic and foreign financing, to achieve off-balance sheet treatment and also to improve profitability."
IRFC provided indemnities to cover events such as set-off, material adverse affect on account of modification and liquidation.
Car finance dominates
The largest part of Indian ABS issuance, however, is securitisations of vehicle loans, and here, ICICI Bank is the leader. It accounts for over 40% of all ABS issuance, with deals backed by personal loans and mortgages as well as loans on every kind of vehicle, from motorcycles to construction equipment.
"We have in recent times tended to securitise more than 30% of our retail disbursals, and in the case of some specific asset classes, we have securitised even higher proportions of our disbursals," says Prashant Purker, general manager and head of the structured products group at ICICI Bank in Mumbai.
In December last year, ICICI Bank sold ABS XXI, a Rp6.6bn ($150m) transaction that was the largest ABS issue backed by personal loans.
In March, it made the first direct assignment of a car loan pool to an investing bank, and raised Rp7bn in the largest ever transaction backed by two-wheeler loans.
In June it raised Rp3.7bn in the largest used car loan issue and Rp3.4bn in an ABS issue backed by commercial vehicle loans, which included three-wheeler cargo vehicle loans for the first time.
HDFC Bank is also an active issuer. Citigroup helped the bank raised Rp13bn ($296m) by selling securities backed by car, utility vehicle and two-wheeler loans.
"This was one of the largest transactions in India," reports Easwaran. "All the instruments were prepayment protected, with prepayments from the pool retained in a reserve and then paid out to investors according to an amortisation schedule. Three of the series had embedded put options with step-up fixed rate coupons. The deal sold easily in a short marketing period, again underlining the strength and depth of the Indian market."
Car loans the backbone asset
Vehicle and consumer loans made up about three quarters of the market in 2004-05; most of the rest was residential mortgage backed securities and collaterised debt obligations (CDOs) accounted for most of the rest.
Three multi-credit CDO transactions, totalling Rp2.8bn, were rated during the year. ICRA notes that growth in corporate loan securitisation in India has been far lower than that in retail asset securitisation..
Issuance of mortgage backed securities (MBS), mostly backed by residential loans, grew 13% in the year to Rp33.4bn ($762m), but the year saw the largest ever MBS transaction in India, a Rp12bn deal from ICICI Bank.
Inamdar at ICRA believes MBS has the potential for faster growth, given the rapid expansion in housing finance. However, he also says that the long tenor of MBS paper, together with the lack of secondary market liquidity, puts some investors off.
Those investors that do buy show a noted preference for par structures and floating rate yields.
ICICI Bank's Nivas V MBS issue in March raised Rp2.9bn was notable for its built-in swap on prepayment insulated cashflows, mitigating interest rate risk..
Citigroup also arranged a ground-breaking securitisation of housing loans for HDFC Bank of Sri Lanka, a bank that has no connection with HDFC Bank of India.
"This was Sri Lanka's first true sale of receivables and helped the originator diversify its funding sources beyond the plain vanilla domestic and foreign financing," recalls Easwaran.. "The structure provides for limited recourse to the seller in the form of the credit enhancement and also enables bankruptcy remoteness from the seller. This is the first structure of its kind for the Sri Lankan capital markets."