The stance of investors on rescheduling pass-through certificate (PTC) payouts and granting of moratorium on the retail loans underlying these securitisation transactions will be a key rating driver for Crisil-rated PTCs in the near term.

After Crisil’s press release (Lack of PTC moratorium may leave one crore retail borrowers in the lurch) dated April 10, 2020, most investors have either granted moratorium (till May 31, 2020) to borrowers of the underlying retail loans and changed their PTC payout structures or are actively considering doing so.

This note outlines the salient features of the different approaches adopted by market participants, the status of moratorium approvals received from investors to date, and their impact on Crisil-rated PTCs.

Vast majority of investors open to rescheduling PTCs, but terms vary widely
Taking cognisance of the sharp asset-liability maturity (ALM) mismatch on account of payment moratorium to the borrowers, several investors have already approved, or are in advanced stages of evaluating, a change in the repayment structure of PTCs.

The structural changes envisaged for Crisil-rated PTCs vary widely across investors. For instance, some investors have suspended cash collateral (CC) utilisation for principal repayments during the moratorium, while some others have suspended CC utilisation altogether. Yet another set of investors has changed CC utilisation for the whole tenure of transaction and not just during the moratorium months. Notwithstanding the differences in the approach, the changes are intended to mitigate short-term ALM mismatches and ensure minimal CC utilisation till the payouts in June 2020 (which pertain to collections in May 2020).

Investor approvals in place in several transactions; in a few, April payouts were made as per modifications to the transaction structure
As per Trustee reports, in 17 out of around 200 transactions under surveillance by Crisil, the CC was not utilised despite a shortfall in collections to make initially promised investor payouts in April. Crisil is given to understand that the non-utilisation of CC in these transactions was on account of change in transaction structure, as approved by the respective investors. The list of these transactions is in Annexure 1.

In addition to these transactions, based on communications from the Trustee/ Investor, Crisil understands that in-principle approvals are in place to modify the PTC structures for around 110 transactions (Crisil awaits the amended documentation for the same).

For all these transactions, Crisil expects to receive the revised repayment schedule basis the moratorium provided to the underlying borrowers, and the amended documents reflecting the structural modifications post the lifting of the lockdown and normalisation of counterparty operations.

In a few transactions, moratorium approvals have been denied or the originators have not made moratorium requests to investors. These transactions are highly amortised, with high credit cover build up, and hence, can withstand limited collections over the next two months without any material impact on the credit quality of the PTC, even without any change in structure.

Crisil assessing credit quality in vulnerable transactions with pending investor approvals
There are some transactions involving Crisil-rated PTCs where the status of investor approvals for rescheduling PTC payouts is still unclear/ awaited even though the originators have made moratorium requests. In the event that investors in these transactions delay decision-making further, or decide against rescheduling PTC payouts for the next two months, credit quality of instruments issued in some of these transactions could materially deteriorate, which would warrant a rating action.

May 2020 payout schedules in most securitisation transactions have been drawn on the basis of billings and expected collections in April 2020. Given the national lockdown on account of the Covid-19 pandemic and the announcement of moratorium on loans, collection efficiencies in April were low across transactions and amounted to only a fraction of the initial EMI amounts. Consequently, if the investors do not grant payment moratorium on PTCs and if the observed collection trends continue through May 2020 as well, a substantial portion of CC will have to be utilised to make the next two months’ payouts in a number of transactions, thereby depleting the credit cover available to the PTCs.

The extent of credit quality deterioration on the PTCs will be a function of the initial CC in the structures, credit cover build up till date on account of seasoning of the pools, the transaction structure, and the monthly promised payouts on the rated instruments under these transactions.

Crisil is monitoring the moratorium approval status and will take appropriate rating action on vulnerable transactions over the next few weeks.

Annexure 1
Crisil-rated PTC transactions where CC was not utilised for meeting April 2020 payouts owing to rescheduling approval from investors