Structured Finance

Overview

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Structured Finance rating encompasses both retail assets and corporate assets in the Indian context. The space covers both off-balance sheet and on-balance sheet structures. It focuses on opining on specific customized solutions and largely covers all forms of facilities whether extended in loan form or tradable instrument form.

In the corporate assets space, partial / full guarantee structures, pooled issuances have recently become prevalent. In retail assets space, securitization and direct assignment are prevalent in India.

In Securitization, identified pool of assets are packaged together and sold to a SPV which in turn issues PTCs (Pass Through Certificates) as financial instruments to the investor. The SPV is typically set up as a Trust and is managed by the trustee. In a direct assignment transaction, the identified assets are sold on a bilateral basis to the investor (and no separate SPV is set up). The Servicer (typically, Originator in India) is appointed by the SPV / investor to collect the underlying loans. The collections from the underlying pool of assets are used to pay the investors.

In case of a securitization transaction, there is generally provision for credit enhancement to achieve target level of rating for PTCs. The credit enhancement can be external (cash collateral, guarantee etc.) or internal (over collateral, subordinated PTCs, subordination of EIS etc.) and can be provided by the Seller or a third party. The Credit Enhancement is provided to an SPV to cover the losses associated with the pool of assets and can be split into first loss and second loss (sequence of utilization within Credit Enhancement). There can also be provision for liquidity facility in securitization to take care of temporary mismatches. In direct assignment transaction, there are restrictions on Seller providing credit enhancement.

In India, a company or any other entity can be Seller / Originator. However, there is dominance of Banks, Non-Bank Financial Companies (NBFCs), Housing Finance Companies (HFCs) as Originator / Seller. The underlying assets are mainly secured loans like housing loans, auto loans, commercial vehicle loans, construction equipment loans, two-wheeler loans, tractor loans, three-wheeler loans, gold loans and unsecured loans like micro finance, personal loans, consumer durable loans.

CARE Ratings uses the suffix ‘(SO)’ for securitization transactions indicating that these are structured obligations.

CARE Ratings has pioneered in rating India’s:

• Single largest MFI securitization transaction in March 2016
• First Consumer Durable securitized pool in November 2017
• First BC-originated MF securitized pool in May 2018
• First two-wheeler MOSEC pool in March 2019