Increase in the covered bond issuances in FY21
A report by Investment Information and Credit Rating Agency (ICRA) mentioned “Domestic covered bonds issuances have witnessed a major increase of about Rs.2,200 crore in FY2021 as against the issuances of Rs.400 crore seen in preceding fiscal”
These bonds have been issued by Non-banking financial corporations (NBFCs), nine in FY2021 as compared to two in FY2020.
It was also mentioned that “The covered bonds have seen an improved acceptance as it provides ‘dual recourse’ benefits to the investor I.e. repayment obligation has to be met by the entity and in the case of failure to do so; by a pool of assets assigned to a trust”
The report said that the given uncertainty on collection due to pandemic the protection available to an investor of cover bond improves when compared with the conventional securitization of the pool of assets
Agency’s Vice-President and Group Head (Structured Finance Ratings) Abhishek Dafria mentioned “We have seen 12 Non-Banking financial corporations (NBFCs) issue covered bonds in the domestic market so far with about 75% of such issuances done by entities having their credit ratings in the single-A category”
“Through the covered bond structures, the entities can lower the risks for the investors by giving an exclusive cover pool of assets assigned to a trust thereby enabling them to improve the credit rating on such covered bonds to double-A or triple-A rating categories,” he mentioned.
Daria mentioned, “Issuers have profited from lower coupon rates on the covered bond issuances due to the higher rating with coupon reduction seen in the range of 0.5℅ – 1.25℅.”
However, the coupon rates remain higher than the benchmark yield for the enhanced rating category due to the new nature of the product and limited market size, he explained.
“We expect the premiums to gradually decline with an increase in the size of the covered bond market through better stakeholder awareness and larger investor participation,” he added.
The agency said almost two-thirds of the covered bond issuances have been in the form of market-linked debentures (MLDs) so far. High net worth individuals (HNIs) and family wealth offices have invested in many of the issuances.
Covered bonds backed by a security pool of gold loans and vehicle loans have found favour with investors, mainly due to the secure nature of the underlying loans, it said.
Agency’s Assistant Vice-President and Sector Head (Structured Finance Ratings) Rachit Mehta mentioned, “For the covered bond market to witness any material growth, participation of other categories of investors would remain crucial, such as mutual funds and insurance companies, who can participate in large-size issuances”
Covered bonds at present form a very small share of the total borrowings of the respective entities, he mentioned.
Though, if the issuances were to increase in the future such that covered bonds formed a meaningful share of the total borrowings, then the company’s ability to maintain the required security cover would remain important, he explained.
“Failure to meet the security cover would result in a step-up on the coupon rate thereby negatively affecting the financial profile of the entity”, Mehta added.