Securitisation deals return, but still at half of pre-pandemic mark
After a slow April and May, securitisation deals gained momentum in June. This boosted the volume for this quarter by almost three times year to Rs 20,000 crore. However, this was only half the pre-pandemic normal. Due to the sharp impact of collections due to the pan-India strict lockdown and moratorium, volumes in the second quarter of last fiscal were muted. About 60% of volumes in the quarter ended June were seen in June.
This fiscal saw a decline in the collection efficiency of securitised pool collections between April and May due to a spike in Covid-19 cases, and associated state-specific lockdowns. Although there were a few deals between originators and asset types that were being considered, investor enthusiasm was low enough to prevent most of them from closing. Many non-banking financial corporations (NBFCs) also reduced disbursements, and downsized new business plans. Physical cash-based collection activities suffered further, leading to lower collection ratios and diminishing interest.
CRISIL Ratings Ltd Senior Director and Chief Ratings Officer CRISIL Ratings Ltd., says that Covid-19's impact was evident in the financial disbursements as well as collections by financiers. Companies were cautious in ensuring employee safety and placed restrictions on business activity. This led to a slowdown in industry operations. Many entities had also raised sufficient capital and liquidity in recent quarters to strengthen their balance sheets. With lower disbursements, this further reduced the need for immediate funding thereby reducing the need for securitisation.
As the Covid-19 case load decreased, interest in securitisation transactions was rekindled. Many transactions were completed and moved forward in the course of discussions. Foreign banks, private banks, public banks and mutual funds continue to make their presence felt by cherry-picking investments in securitized assets via either pass-through certificate (PTCs), or direct assignment (DAs).
Commercial vehicle loans were the main draw of asset-backed securitisation, but transactions backed with gold and business loans found favor. ABS transactions accounted for 47% of total securitisation volume (see Annexure, Chart 1). Mortgage-backed securitisation (MBS) accounted for 53% of volume. This was despite the fact that there was interest from both private and public banks. In some transactions, HFCs invested in assets from other HFCs.
The DA route remained popular, with up to 52% of volume being securitized through this method. The remaining 48% was made up of PTCs.
Covered bonds, which are a structured-finance product that make up 2-4% of total issuance, have accounted for around 24% of the issuance in the last quarter. These instruments provide primary recourse for the issuer's existing on-book funds and an alternative to a set of loan assets. These loan assets can be assigned to a separate trust, a special-purpose vessel (SPV), or are subject to predefined triggers depending on the transaction structure. In the last quarter, these bonds continued to attract investors with issuance accounting at 2% of total volume. In cover pools, issuers also deployed newer asset types such as personal loans, business loans, and loan against property (LAP) to finance entities.
More than 40 entities completed transactions. Some assignors were able to make their first deals. The majority of these transactions were structured using a TIUP (timely interests and ultimate principal), waterfall mechanism. Interest was promised regularly and principal would be paid only at maturity. Some transactions involved microfinance receipts from multiple originators in the securitised pool. This is a structural shift from the traditional one transaction originator model and helps to reduce concentration.
The future traction of securitisations will depend on how the pandemic is managed, whether containment measures are removed, and whether there is a rebound in business activity. The severity of asset quality issues that are cropping up in portfolios of issuers across all asset classes will also impact the volume of securitisations.
CRISIL Ratings Ltd Senior Director Rohit Inamdar says, "If fiscal 2021's experience is sufficient to be a benchmark, this fiscal's volume should be closer the pre-pandemic level. This could be affected by factors like large-scale recurrences of Covid-19 cases and weak demand recovery. These issues, as well as sub-normal monsoons and asset quality issues, could also have an impact. These factors would need to be closely monitored and their impact carefully assessed over the coming months ."