CRISIL has assigned its ratings of ‘AA(so)’ and ‘BBB(so)’ to the Series A1 and the Series A2 pass through certificates (PTCs), respectively, to be issued by IFMR Trust Pioneer – I. These PTCs are backed by microfinance loan receivables originated by Equitas Microfinance India Pvt Ltd (Equitas).

 

PTC	Yield Terms	Principal (Rs. mn)	Tenure# (Months)	Credit Support (Rs. mn)	Rating
Series A1	Fixed	125.4	20	49.6*	AA(so)
Series A2	Residual	31.3	20	18.3	BBB(so)
Cash Collateral	-	18.3	20	-	Unrated

 

# Actual tenure will depend on the level of prepayments in the pool, and on the exercise of the clean-up call option.

* Credit support for the Series A1 PTCs includes Rs 31.3 million in the form of subordination of the Series A2 PTCs. The rated PTCs also enjoy credit support in the form of excess interest spread (EIS)

Microfinance Institutions (MFIs) extend small loans to the poor, to sustain economic activity and build productive assets; MFIs have disbursed more than Rs.100 billion of loans to 15 million borrowers across India. This is the first time in India that microfinance loan receivables are being securitised and rated. The transaction is an important milestone for the MFI sector: access to capital markets through securitisation is a key growth enabler for microfinance, and can accelerate the social benefits arising from it. Moreover, the transaction incorporates innovative structural features for the first time in the Indian securitisation market; these features optimise the cash collateral requirement while providing credit protection that is consistent with the assigned ratings.

The ratings are based on the credit quality of the pool cash flows, Equitas’s origination and servicing capabilities, the credit support available to the PTCs, the payment mechanism for the transaction, and the soundness of the transaction’s legal structure. The senior Series A1 PTCs are entitled to receive interest on a fortnightly basis, but the principal repayment is not fixed and needs to be made by the maturity date of the PTCs (technically, this is an ’ultimate payment’ structure). Payouts to the Series A2 PTCs, which are fully subordinated to the Series A1 PTCs, will start once the Series A1 PTCs are fully redeemed (making it a ’sequential payout’ structure).

The transaction is structured at par: the trust will issue the PTCs in exchange for a purchase consideration that is equal to the pool principal outstanding at the time of issuance of PTCs. Investors in Series A1 PTCs enjoy credit protection in the form of subordination of the Series A2 PTCs, the cash collateral stipulated for the transaction, and the excess interest spread (EIS) that is trapped in the structure. Credit protection available to Series A2 PTCs is in the form of cash collateral and EIS.

The pool principal being securitised comprises receivables from microfinance loans. The pool, which has a weighted average seasoning of 6 months, predominantly comprises loans disbursed in the cities of Chennai and Tiruchirappalli, with the top three branches accounting for 19.3 per cent of the pool principal. The average ticket size of the pool is Rs.10,246. All the contracts in the pool are current.

IDBI Trusteeship Services Ltd is the trustee for this transaction. The transaction has been structured and arranged by IFMR Capital, a Chennai-based NBFC.

Equitas, incorporated in June 2007, is a non-deposit taking non-banking financial company (NBFC-ND) registered with the Reserve Bank of India (RBI). Equitas started operations in December 2007; as of December 31, 2008, it had 65 branches with portfolio outstanding of Rs.1.85 billion. Its net worth as on September 30, 2008, was Rs.630.2 million. Equitas is primarily engaged in microfinance lending to women through the joint liability group model, wherein each member of a five-member group guarantees loan repayments of the other members of the group.

Unlike other MFIs, Equitas has separate business origination and collection teams. Most leading MFIs operate in rural and semi-urban areas disbursing loans for short tenures of up to a year, and have a weekly collection model. However, Equitas operates in urban areas, disbursing relatively long-tenure loans of up to two years, and collects every fortnight. For the six months ended September 30, 2008, the company reported total income of Rs.77.3 million compared with total income of Rs.7.5 million for the six months ended March 31, 2008.