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Monday, 11 December 2017

Asset-backed appeal

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  • Labourers change the display of a Lifestyle departmental store at Phoenix market city in Mumbai.

Indian borrowers are looking at issuance of asset-backed bonds as a means to cheapen their funding sources and broaden their investor bases.

Several Indian companies are turning to offerings of asset-backed bonds as an alternative source of funding and bankers expect the trend to accelerate as many cash-strapped issuers from the infrastructure and real-estate sectors spot an opportunity to save on borrowing costs.

A handful of asset-backed structures emerged in 2015, pointing to the growing popularity of a format that can be tailored to suit the demands of both issuers and investors.

“Structured bonds offer good opportunity of diversification to new issuers and higher yields to investors, including mutual funds,” said Rahul Bhuskute, head of structured & credit investments, ICICI Prudential AMC. As of September 30, his fund had Rs1.6trn of assets under management.

“The sponsor profile is relevant for refinancing. The sponsor is also the manager of the property and hence, during refinancing this fact plays a big role.”

Mutual funds have emerged among the key investors in these asset-backed offerings, with proceeds mainly going to retire high-cost bank debt.

Property-backed bonds are a local version of commercial mortgage-backed securities, or CMBS. Following last year’s marquee transactions from DLF and K Raheja Corp, at least two issuers have completed such offerings in 2015 and more are in the pipeline.

In June this year, Velankani Information Systems raised Rs3.15bn from a five-tranche securities, backed against receivables from the commercial leases of its IT park and a hotel in Bengaluru, in operations for over 10 and five years, respectively.

The eight-year securities, locally rated AA (SO), have a put/call after year five. The paper yields in the 11% to 13% range.

In August, Phoenix Mills raised Rs4.5bn from five-year securities backed against rental income from the borrower’s Phoenix Marketcity mall in Chennai.

Offering a monthly coupon at 9.95%, or an annualised yield of 10.41%, the securities scored an AA+ rating and had three mutual funds as subscribers.

India’s biggest listed developer DLF raised Rs9bn last year when it sold two different bonds backed against lease rentals from its shopping malls. It has plans to raise a further Rs36bn through similar offerings.

Such structures present a significant opportunity. In real estate alone, analysts expect mall floor space to increase to 97.9m square feet in 2016 from 77.6msf in 2014. Many mall owners are looking to refinance their bank debts through offerings of structured bonds.

Depending on the issuer and type of assets backing such securities, they bring cost savings of anywhere between 25bp and 125bp, besides giving them access to the surplus cash flow upfront.

These asset-backed issues differ from global international CMBS offerings, where lenders securitise mortgages from several commercial properties through bankruptcy-remote special-purpose vehicles.

Indian securitisation trades have to be done through pass-through certificates, but these are still mired with tax complications. India is also yet to clear corporate bankruptcy laws.

Property-backed bonds have been followed with those backed against annuity payments, credit wraps or even bonds paying variable rates.

In July, Pune-Solapur Expressways, a SPV with Atlantia and Tata Group company TRIL Roads as equal owners, raised Rs7.88bn from 14-year notes at a monthly coupon of 10.15%, a 40bp spread over the 9.75% base rate of arranger Kotak Mahindra Bank.

After a year, the investors will have the option to quote a new spread every year until maturity, subject to the approval of the issuer, giving the benefit of a market-linked pricing to this locally Single A rated paper.

Balancing act

“In India, a CMBS is usually backed against a single property, but involves lease rentals from multiple tenants. So, to that extent, there is some diversification. Yet, concentration risk due to a single property exposure remains,” said Bhuskute of ICICI Pru.

There are some distinct differences from the globally recognized CMBS format, notably around the role of the sponsor. In India, these issues are more similar to lease-rental discounting (LRD) loans, a relatively common form of secured borrowing in the local market. An LRD loan amortises over the life of the debt, whereas the property-backed bonds mostly come with bullet maturities.

“Theoretically, the underlying property (in a CMBS) could be taking care of the debt repayment, but there is a lot of issuer/sponsor involvement,” Bhuskute said. “The sponsor profile is relevant for refinancing. The sponsor is also the manager of the property and hence, during refinancing this fact plays a big role.”

Considering these risks, Bhuskute feels the ratings on the Indian CMBS need to be in the A+ to AA– range rather than higher. Consequently, the pricing should have also been higher than what these offerings paid, he says.

On their part, issuers argue that deal structures have been tightened to reduce refinancing risks. For instance, in the Phoenix Mills transaction, amortisation was built-in to ensure 40% principal repayment.

Issuers are also providing strong security packages, as well as interest service coverage ratios of over 2x. Cash-flow entrapment is also aggressive, along with a pre-funded debt service reserve account and these asset-backed offerings mostly have a loan-to-value ratio of less than 50%.

“Yes, there is still some sponsor-linked risk left on the table because these trades are not totally alienated [from their sponsors] as in pure securitisation,” said an analyst involved in some property-backed offerings. “However, such risk is minimal as only strong sponsors can meet rigorous conditions of such structures.”

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