Pass Thru Certificates

Finance has evolved from being a world of relations to a world of transactions. Financial institutions that primarily are in the business of maturity transformation, often feel the requirement of funds. Take for example: banks that lend for a home loans typically for a tenure of 15- 20 years, however when they borrow through deposits they borrow for a period of not more than 5 years. This creates an asset liability mis-match for them. So how do they bridge their funding gap? One of the ways they can do it is Securitisation. Securitisation refers to creating marketable securities out of future revenue streams, or simply put, raising money by selling future cash flows. For instance if a bank lent Rs 25 Lakh to a borrower as home loan for 20 years, it is going to receive back the money thru monthly installments of a fixed amount over that period. The bank can either wait for 20 years to receive its money back or it can simply issue a security to raise money from the market issued against the expected cash flow from the loan made. The bank can then the cash flow to repay the money raised as and when it receives the money. This way the bank does not have to wait for 20 years and can plug its funding requirements. One of the forms that securitisation can take is called Pass Through Certificates (PTC). Usually while issuing PTCs the originator (financial institution that made the original loan) pools in multiple loans and borrows money against that pool. For instance a bank that lends to multiple home loan borrowers can pool together a number of such retail borrowers and issue a PTC against a pool of such loans. However in India, a variant called Single Loan PTC is popular. Here, instead of a retail pool, the originator issues a PTC against a loan given to a single entity. For example say Bank A has lent Rs. 50 crore to company B for business funding for say a period of 5 years. Bank A can then securities this loan by issuing a single loan PTC. Single loan PTCs offer transparency as against retail pool PTCs since the financial details of the original borrower are known. For example if a single loan PTC has been issued by an originator against the loan given to say, IBM then the credit risk of that PTC is akin to the credit risk of IBM and not the originator of the PTC. This is because eventually IBM and not the originator would make the repayments. Mutual funds, Insurance companies and provident funds may invest in single loan PTCs where the end borrower has a strong financial history and high credit rating. Kotak AMC invests in single loan PTCs where the original borrower has high quality credit rating. Some of the single loan PTCs that we have exposure to are listed below:

PTC
Vodafone HPCL LIC Housing Finance BPCL Tata Capital Power Finance Corporation IBM Idea Cellular

Rating
F1+ P1+ P1+ P1+ AA+ AAA AAA P1+

We trust the above addresses concerns if any relating to our exposure to PTCs. As always, we remain fairly conservative as far as credit assessment is concerned. This philosophy has held us in good stead even in turbulent times in the economy.