Wednesday, 19 December 2018

India 2005 - Exciting times

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These are exciting times for Indian securitisation. Issuance volume is growing, new structures are appearing and a wider range of investors is becoming comfortable with such paper. The soon-to-be-finalised securitisation regulations will provide yet another boost to what is becoming one of Asia’s most interesting ABS markets, writes Matthew Davies.

The numbers speak for themselves. According to Thomson Financial’s figures, in 2003 the Indian securitisation market totalled US$418m from 22 deals. In 2004 it was US$1.32bn from 29 and so far this year the market has seen issuance of US$1.27bn from 21 deals. Not only is the market growing enormously, the size of each deal is increasing significantly too – the largest deal in 2003 was US$56m; in 2005 the biggest has been US$345m.

The breakthrough deal came in October 2003 when ICICI privately placed a Rs8.23bn (US$181m) autoloan deal, at the time an enormous jump relative to the US$20m–$30m deals that were the norm. More recently, HDFC put that deal in the shade when it sold a US$345m autoloan transaction in a deal that was lapped up in just a few hours despite a size that would not look out of place in the cross-border markets.

One of the most important reasons for the market's impressive growth is the increasing acceptance of securitisation amongst the Indian investor base, in particular, public sector investors, including state-owned banks and mutual funds. Another reason for the rapid rate of development is India’s booming economy and the related explosion in consumer financing. These have provided bankers and finance companies with large pools of assets to securitise, and the incentive to flip assets in order to raise new sources of financing.

“The market has been growing at a very fast pace over the last two years or so," said Vinod Kothari, an expert on Indian ABS. “Part of this is related to the pace of growth in the economy as a whole, but securitisation makes eminent sense to a lot of people. [They] gain liquidity, make more efficient use of capital and boost profitability. The deal sizes have increased as fixed-income investors have gained more confidence with asset-backed investments. Mutual funds and nationalised banks are tuning in with huge appetite.”

The final piece of the jigsaw could also soon be in place, as regulators are putting the finishing touches to a proposed all-encompassing securitisation law that will set the product on a firmer footing and demonstrate that ABS has official backing. Draft regulations were released by the Reserve Bank of India in April and the authorities are now finalising them in light of many comments from the market. Not all of the comments were positive – there were worries in particular about whether deals that have some support from originators would have to be consolidated on originators’ books – but pros are hopeful that the final shape of the regulations will be reasonable.

The new regulations will be an important development said Kothari. He also believes that two other developments are necessary for India to confirm its place as one of Asia’s leading securitisation jurisdictions. “The market badly needs two more things – we need arbitrage CDOs which will create appetite to invest in subordinated pieces of securitisation transactions. And we need synthetics, because the present form of cash securitisation is too cumbersome and costly and particularly unsuitable where banks do not need liquidity.”

A cross-border deal would confirm India’s emergence on the world structured finance stage. The chances of this are now reasonable and the first such transaction could take place after the new securitisation law is finalised.

Many international bankers have pitched dollar MBS deals to the Housing Development Finance Corp and dollar autoloan transactions to offshoot HDFC Bank. Neither seems to have bitten yet, but they are certainly listening to the pitches with interest.

It has not always made economic sense for Indian issuers to go offshore, but as the surge in cross-border convertible bonds and syndicated loans show, the offshore markets may now provide funding at levels competitive to the domestic market.

One intriguing possibility that bankers are beginning to discuss is the chance of convincing Indian oil majors such as ONGC to issue the kind of future flow deals recently done in Indonesia for Bakrie group companies, and more usually associated with Latin American oil giants. As it stands, such a deal is probably some time away, but should ONGC seek to make significant acquisitions – as is distinctly possible – a future flow securitisation would become much more likely.

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