HDFC ties up with Citibank to raise Rs. 500 mn through a 10-year securitised paper

HDFC Bank signed up with Citibank N.A. to raise half a billion rupees through a 10-year securitised paper to feed its booming housing loan portfolio. HDFC Bank signed up with Citibank N.A. to raise half a billion rupees through a 10-year securitised paper to feed its booming housing loan portfolio. Securitisation allows firms to borrow against future cash flows, which are channelled into a separate legal entity or a special purpose vehicle (SPV).

The state housing bank, who plans to come out with a Rs. 500 mn public issue shortly, needs Rs. 3 bn this year, to disburse loans to mid and lower income earners.

"We mostly raise funds through state banks, but we usually raise about a billion rupees from the debt market as well," HDFC Bank's CEO, C A Sarathchandra told a reporters on Thursday.

HDFC, which has an A (sri) entity rating from Fitch Ratings Lanka, plans to get a rating for the debt issue, catering to pension funds. With a rating, Sarathchandra says, HDFC could even trade part of the issue.

Citibank CEO Kapila Jayawardene says the issue will come out during the fourth quarter of this year and the pricing announced closer towards the launch date.

Unlike its previous securitisation issues, HDFC has opted to go for an off balance sheet issue, where the assets are transferred to a SPV.
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But the SPV has no parate powers, putting things in a legal limbo.

Though asset securitisation has been around since the mid-1990's, local laws do not recognise such transactions.

Besides HDFC, most local issuers are leasing companies who transfer the lease receivables and not the assets to the SPV.

In a true securitisation form, receivables cannot be legally assigned to offset debts by an originator under the present laws, to achieve a 'true sale'.

In the absence of a Securitisation Act, Sarathchandra says issuers rely on the Trust Ordinance, the Registration of Document Ordinance and the Mortgage Act.

But this has not stopped local firms from raising over Rs.

10 bn in the last two-years by securitising their future cash flows.

"What goes on now is not a true form of securitisation. Without proper guidelines, it’s risky from an investors point. But a new Act is being drawn up to fill the void," says Sarathchandra.

The Act is expected to see the light sometime next year.

In the absence of a law, the bankruptcy procedures become complicated under the present structure.

In theory, monies can still be recovered by the Trustee and transferred to the investor.

Officials are also trying to get parate execution powers extended to trustees or the SPV's in mortgage backed securitisation.

-LBO Newsdesk: LBOEmail@vanguardlanka.com