Banks, Mutual Funds rejig close to 70,000 crore securitised papers


Mumbai: Banks and mutual funds have rejigged close to 70,000 crore of securitised instruments in the last one month as millions of individuals who borrowed to buy home, car, and two-wheeler did not service the loans.

The cash flows from these securities have been adjusted in a manner so that the changes would neither qualify as default in the books of these institutional investors, nor adversely affect the net asset value (NAV, or price of an MF unit).

The originators of these instruments, called pass-through certificates, are largely non-banking finance companies (NBFCs), which over the past five years had emerged as significant providers of consumer loans. In a securitised deal, an NBFC transfers a basket of retail loans to another vehicle, which then issues securities against the loan pool. Banks are the primary investors of these securities with MFs holding about 6%. The interest earned on the underlying loans is used to service the securities.

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Outstanding PTCs in the financial market are estimated to add up to around 1.25 lakh crore. Investors had to take a decision on these papers as many retail borrowers opted for moratorium.

“In tweaking the transaction structure, key features like the tenor of the securities, the interest return or the principal may be left untouched. For instance, if an instrument has a residual maturity of 24 months (beginning March) and there is a moratorium of six months on the payment of interest and principal on the underlying loans, the plan is to recover the shortfall in the balance 18 months. So, the repayment is adjusted in a way that the moratorium is reflected in the cash flow,” said a fund manager.

It’s easier to restructure securities where the principal amount is paid on maturity. “For papers, which have a monthly payment of principal along with interest, investors have to take a call. It becomes dicey if the underlying loans are not under moratorium. In such cases, if borrowers are unable to pay EMIs, the vehicle issuing PTCs has to use the cash collateral,” said a rating agency official. This cash collateral is provided by the originator.

JPL CHALLENGES DOWNGRADE

Since the lockdown, some of the corporate borrowers have taken the legal route to stall rating action. The latest to move the court is Jindal Power (JPL), which has challenged rating agency Icra’s decision to downgrade the credit rating on the company’s debt securities to triple-B from triple-B-plus, and revise the rating outlook to ‘negative’ from ‘stable’ in the wake of the Covid-19 outbreak. In its prayer before the Delhi High Court, the company has said the physical and electronic records of the credit rationale (by Icra) should be removed and an ex-parte ad interim order should be granted so that the earlier rating of triple-B-plus continues to be valid till the hearing and final disposal of the suit. Stating that the rating rationale would make it difficult for it to tie up additional working capital and participate in further bidding, the company said since it was one of the few entities whose operations were not significantly affected by the pandemic, its rating should have been upgraded.

According to Icra, among other factors the downgrade was due to “…expected moderation in JPL’s debt coverage metrics and liquidity profile, owing to its continued inability to secure incremental long-term/ medium-term PPAs for three-fourth of its 3,400 MW installed capacity as well as to correct its receivables position.” “The off-take risks stand heightened as lockdowns due to Covid-19 have adversely impacted the all-India electricity demand, in turn, affecting company’s sales in the short-term/power exchange market,” said the agency.





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