Kothari Pioneer Rejects Citi Offer On Securitised Debt

Kothari Pioneer has turned down Citibanks offer of a pool of securitised debt. This pool of debt comprises Citibanks auto loan receivables.

The effective yield that the bank has offered on this pool is about 18 per cent, though the auto loans it had made fetched yeilds of over 23 per cent.

Sources said that the decision to turn down the offer stemmed from Citibanks refusal to offer this pool on a back to back basis.

This means that Citi would have to provide guarantees on the cash inflows on this pool of securities, which it was not willing to do.

Instead the bank had offered it on a without recourse basis (pass through certficates) implying that the cash flows would directly accrue to Kothari mutual fund and an additional cushion of seven per cent stream of revenues, to offset the potential delinquency in the portfolio.

Despite this additional cushion, the credit risks attached to this portfolio of securitised debt would also have to be assumed by the mutual fund.

The approximate value of the securitisation is around Rs 25 crore.

Says a Kothari Pioneer official, Our income funds comprise of high quality debt and we would not like to increase the risk levels of this portfolio.

We would prefer to have it instead on a with-recourse basis which would act as the credit enhancement vehicle for this pool of securitised debt.

For Citibank using such innovative instruments was actually an off balance sheet form of financing which would not entail any reserve ratios in the form of either statutory liquidity ratio or cash reserve ratio.

And if this entire exercise is performed before the end of the financial year, it would also have meant the bank would not find the need to make any capital adequacy provisions.

However, the escape from capital adequacy is possible only if the entire securitised pool is on a without-recourse basis.

Providing gurantees would still mean that it would have to show the liabilities in its balance sheet.

But there will be no reserve ratios on such inflows that take place.

For Citi this is not the first time that it has been resorting to debt securitisation vehicles.

Back in 1993, it had securitised a pool of property recievables of the Delhi based DLF properties and followed up the same with auto loan recievables in 1994 and 1995.

These pools were securitised on a with recourse basis and a portion of this debt was picked up by GIC mutual funds income schemes.