Asian Development Bank (ADB) is pushing for publicly tradable securitised bonds in the capital market. The bank is to support a securitisation bill to parliament so that Special Purpose Vehicles or SPV's used in these deals, can be set up as separate legal entities.
In securitisation deals, assets are taken off the balance sheet and sold to an SPV, which will typically have a higher credit rating than the issuing company.
The issuing company can then borrow using the SPV as collateral.
Securitisation helps mainly mortgage and leasing financiers raise money at cheaper rates, as assets assigned to the SPV will be of better credit quality than credit standing of the issuing company.
However, in Sri Lanka SPV's don't have legal recognition as separate legal entities because there are no laws to regulate asset pooling.
Some investors worry that this leaves room for the parent to claw back the assets from the SPV.
Most current deals are done through the formation of a trust that holds the assigned assets.
ADB also wants to help the Securities and Exchange Commission (SEC) here acquire skills to administer and regulate SPV's. SEC is the capital markets regulator.
Securitised bonds, issued by SPV's that have assets assigned to them, will be tradable on an exchange.
Publicly traded securitised bonds will also lower the interest rates for borrowers, lower the credit risk for lenders and investors and increase liquidity in the market.
In the long term, these bonds will reduce interest rates in general and strengthen the financial system according to the ADB.
Securitised paper is a popular fund raising mechanism for leasing and mortgage financiers here.
Industry players have been talking about a Specialised Act for securitisation for years but a draft is still not available.
-LBR Newsdesk: LBOEmail@vanguardlanka.com