Northern Arc Capital invests in India's first Rs 38-cr PerSec transaction

Northern Arc Capital has closed India’s first Persistent Securitisation (PerSec) transaction of Rs 38 crore after the issuance of the Securitisation Guidelines in 2012. 

The underlying assets are vehicle loans originated by EssKay Fincorp Limited. Northern Arc Capital, erstwhile IFMR Capital, had earlier executed a similar structure in 2011 for microfinance loans. Globally, Persistent Securitisation has found acceptance amongst a wide variety of market participants, issuers as well as investors alike, with underlying receivables ranging from vehicle loans and agricultural receivables to mortgagees. 

Northern Arc Capital is a Chennai-based non-banking financial company (NBFC).

A persistent securitisation structure allows an originator to raise longer-term funding using shorter tenor assets. The collections from the initial pool of underlying loans are used to buy additional pools of loans on an ongoing basis during a period termed as the "Replenishment Period". After the replenishment period is over, the pool starts amortising like a regular securitisation transaction, said the firm.

Investors benefit from the transaction as it allows them to lock in a pre-determined yield for a longer period of time and helps them avoid repeat transactions. During the replenishment period, there are trigger events built in to ensure that any credit concern on the pool or servicer will lead to the immediate termination of the Replenishment Period. For investors who are targeting a specific category of assets (e.g. Priority Sector Loans for banks), the product enables them to avail the benefit for a longer duration compared to a regular amortising securitisation transaction.   

Dr Kshama Fernandes, Chief Executive Officer (CEO) of Northern Arc Capital said, “The PerSec product is unique in many ways and enables the Originator to get continuous funding for a longer tenor without multiple transactions and disbursements from lenders. It reduces transaction costs and provides a longer term option of investing in shorter tenor assets for lenders.  We believe it has great potential given the credit profile and asset quality of many of our partners that will provide investors with the confidence to stay invested in their transactions for a longer period of time”.

In the current structure, there is an envisaged replenishment period of six months when additional loans will be purchased on a quarterly basis. This increases the quantum of funding that Esskay is expected to receive by fifty per cent. The current transaction has a two-tranche structure, rated AA-(SO) for the senior investor and A-(SO) for a subordinated investor.

"The structure enjoys the benefit of additional credit support coming from principal subordination, cash collateral and Excess Interest Spread", said Fernandes.