The Hindu Business Line : HFCs take securitisation route

Among the HFCs that have taken this route for raising low cost resources in a soft interest rate regime include Canfin Homes Ltd. Canfin Homes had recently raised Rs 65 crore by securitising only a pool of its principal receipts also referred to as the par structure by bankers.

The Canfin Homes Managing Director, Mr Peter D.F. Cardozo, Managing Director Canfin Homes, confirmed this structure and said, "We intend raising another Rs 35 crore on a similar structure."

Banking sources said a falling interest rate regime removing some of the high interest rate loans from their books also mean that the long-term earnings of HFCs would be adversely impacted. Once the assets and cash flows are taken out of the books, HFCs are not allowed to book the interest as part of their earnings.

However, HFCs are keen on taking advantage of the present regime of soft interest rates. Accordingly, securitisation of the principal allows them to raise funds at discounting rates of anywhere between 5.5 and 6.25 per cent. In fact, the spate of securitisation deals during this year had all seen rates in this range. At the same time, it allows HFCs to protect or even improve their spreads. The incremental spreads for most HFCs were actually in the region of about 3.5 - 4 per cent, better than most banks, Mr Cardozo explained.

Outright borrowings, on the other hand, implied lower spreads, he added.

HFCs were also not willing to raise resources through borrowings or issue of non-convertible debentures immediately for fear of impacting their capital adequacy ratio. But costs of mortgage-backed securities (MBS) are comparable to External Commercial Borrowings (ECBs), bankers said.

ECBs inclusive of forward cover of about 1 per cent would be in the region of about 5 per cent. However, ECBs are less preferred in view of the cost implications in the event of exchange rate fluctuations, since forward cover is available only for six months.

Besides, Mr Cardozo explained, raising resources through MBS also adjusted asset-liability mismatches, since the entire cash flows were being passed on to MBS subscribers, who are mostly insurers and mutual funds. On the other hand, debt funds were available only for short dates in soft interest regime, with the potential for asset liability mismatches.

However in parcelling out the principal flows, few actually make profits. It is only when the interest portion is sold that they make profits. The advantage is that the companies are able to raise resources at low costs, without any impact on their leveraging ratios. If the leveraging is affected, HFCs would have to access capital markets again. Not many are keen to raise such resources in view of the long-term cost implication of raising equity resources.

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