Piramal turns to securitisation of real estate loans to raise cash

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Published: October 7, 2019 4:41 AM

Two subsidiaries— Piramal Capital and Housing Finance, and PHL Fininvest— are looking to raise over Rs 2,372 crore

Piramal Enterprises, PCHFL, PHL Fininvest, retail loans, SPV, PTC interest, CrisilThe instrument issued by Piramal has been assigned ‘Provisional AA+ (SO)’ rating by ratings agency Crisil, which is the second highest rating in its ratings scale assigned to an instrument carrying a low risk of default.

Two subsidiaries of Piramal Enterprises are looking to raise over Rs 2,372 crore by issuing the country’s first asset backed securities, where the underlying asset will be wholesale loans to real estate developers. The two subsidiaries are Piramal Capital and Housing Finance (PCHFL) and PHL Fininvest and they are raising this amount by securitising a pool of wholesale real estate loans, sources in the know told FE. Potential investors will be issued instruments called Pass Through Certificates (PTCs), which are used in asset-backed securities structures. Queries sent to Piramal Enterprises remained unanswered till the time of going to the press.

So far, India has seen securitisation of retail loans like home, vehicle or micro-finance loans. Such wholesale loan securitisations have been few in India, and rarely rated, making this a first rated securitisation instrument of wholesale loan book in the domestic market, said a person familiar with the developments. Given that the underlying risk is high, ratings experts have not been positive on these instruments so far.

The instrument issued by Piramal has been assigned ‘Provisional AA+ (SO)’ rating by ratings agency Crisil, which is the second highest rating in its ratings scale assigned to an instrument carrying a low risk of default.

In order to mitigate the underlying risk, this instrument is backed by credit enhancement — a cash deposit with a bank. A majority assets in the pool are unrated and in sub-investment grade. More than 80% of the asset pool is from the real estate sector with a geographical concentration. Incidentally, the sub-prime crisis in the US – which led to the global financial meltdown in 2008 – was largely due to similar instruments.

According to a ratings note seen by FE, the instrument carrying a coupon rate of 10.5%, has an indicative maturity of 30 months as per the scheduled pool cashflows, whereas the legal final maturity is 72 months —September 15, 2025. The way it works is that the originator of the loans – the entity that is holding the loan book – assigns these loans to a special purpose vehicle (SPV). The SPV in turn issues PTC to the investors. Initially the subscription amount raised from the investors is passed on to the originator, and on an ongoing basis the repayment collected from the underlying loans by the originator is passed on to the investors. Usually, investors expected to invest in these instruments are high-networth individuals and/or institutional investors.

In case of a shortfall in collections, about three and half years or a longer period of time is available to enable reasonable recovery from non-performing assets. There is a monthly payout schedule for principal and interest. However, non-payment of these does not constitute a default on the instruments. “Default on the PTCs is defined as non-payment of PTC interest (10.5% coupon rate) and principal in full by the legal final maturity date,” the ratings note said.

In this case, PCHFL and PHL Fininvest are the originators who lent money to the real estate developers and are now securitising these loans under a trust name ‘Master Trust Series I’, which is issuing PTCs under this transaction. The transaction is backed by a pool of construction finance, loan against property (LAP), loan against shares (LAS), project finance, lease rental discounting (LRD), senior debt and structured debt loan receivables, with a pool principal of Rs 3,388.90 crore.

The proposed issuance assumes significance as under the current scenario, most NBFCs are facing a challenge from their real estate loan book. Residential inventories are piling up, with no buyers in the market for the price points where maximum stress resides. This structure allows Piramal Enterprises to unlock some of the value of the loans asunder.

According to industry experts, securitisation is an alternate way of raising funds for the NBFCs, at a time when their funding sources are severely constrained. Securitisations went up to Rs 1.9 lakh crore in financial year ended March 31, 2019, as against Rs 85,000 crore in the previous year.

In case of a short-fall in the underlying collections, the deposit is broken and money is passed on to the investors. In this case, the overall credit enhancement with a credit collateral of Rs 474.45 crore or 10.5% of the pool cashflows is available.

Catalyst Trusteeship Limited (CTL) has been appointed as the trustee to monitor the transaction on behalf of the PTC investors. PCHFL and PHLFPL will continue to service the pool contracts as servicing agents.

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