The instruments were backed by loans originated and serviced by Dewan Housing Finance Corporation, Crisil said.
Ratings agency Crisil said in a note that recent defaults on some securitised instruments, triggered by a particular interpretation of a recent Bombay High Court orders by an originator, pose a significant risk to the securitisation market and can materially reduce investor appetite if not addressed immediately.
The instruments were backed by loans originated and serviced by Dewan Housing Finance Corporation, Crisil said. “The defaults were not because the transactions had run into cash flow problems. The collection performance of their underlying assets was robust and there was also substantial cash collateral to service the investor payouts comfortably,” the ratings agency pointed out.
It explained that the defaults had two triggers — one, the servicer of the securitised pools of receivables (also the originator) not transferring the collections to the Collection and Payout Account (CPA) based on its interpretation of the HC orders; and, two, the inability of trustees to access the cash collateral (typically FDs in a timely manner to pay investors on the due date.
“The Bombay HC orders, prima facie, do not explicitly restrict the originator from depositing collections from securitised assets into the CPA from which investor payouts are made. They have imposed caps on payments to secured and unsecured creditors. The originator has seemingly interpreted this to include servicing of securitised transactions,” it said.
The interpretation calls into question the bases on which ratings on securitised instruments differ from the credit profiles of originators — ‘bankruptcy-remoteness’ of securitised assets arising from ‘true sale’, and ‘bankruptcy-remoteness’ of ‘assets held in trust’ from the originator/servicer. These derisking features are the bedrock of securitisation deals not just in India, but worldwide, it said.