Fitch affirms HDFC Home Loan Securitisation Trust at ‘AA-(lka)’

November 13, 2006 (LBO) – HDFC Bank, Sri Lanka’s largest housing bank, retained its ‘AA-(lka)’ rating for their home loan securitization trust series, Fitch Ratings Lanka said Monday. The rating is for the timely interest payment and the ultimate payment of principal.

The pass-through certificates or PTCs are backed by a pool of residential mortgage loans, with an aggregate capital balance of 706.2 million rupees at inception (May 16, 2005).

The loans were originated by HDFC Bank (rated ‘A(lka)’ by Fitch), which continues to service the underlying assets. The home loan securitization trust is a special purpose vehicle (SPV) created for the sole purpose of this transaction.

Fitch statement below:

Fitch Ratings Lanka affirmed the ‘AA-(lka)’ (AA minus(lka)) rating on the Series-A pass-through certificates (“PTC”) issued by the Home Loan Securitisation Trust 2005 (“HLST”).

The rating is for the timely payment of interest and the ultimate payment of principal on Series-A. The PTC’s are backed by a pool of residential mortgage loans, with an aggregate capital balance of LKR706.2 million at inception (16 May 2005).

The loans were originated by HDFC Bank of Sri Lanka (“HDFC”, rated ‘A(lka)’), which continues to service the underlying assets. HLST is a special purpose vehicle trust (“SPV”) created for the sole purpose of this transaction.

The affirmation is based on the robust performance of the transaction to-date, the availability of credit enhancement to Series-A investors in the form of a cash reserve, excess interest spread (“EIS”) and high over-collateralisation, and the strong credit quality of the underlying collateral.

A total of six quarterly payouts have been made on the Series-A PTC’s, corresponding to the period from 16 May 2005 to 16 October 2006, reducing the outstanding principal due on Series-A by 33.1% to LKR338.5m (from LKR506.4m at inception).

The collection efficiency of the underlying assets have been strong, with gross monthly collections averaging 81.4% during the period, and cumulative collections at 118.7% of total dues at end-September 2006.

Cumulative prepayments amounted to 7.06% of the initial collateral principal during the 17 months leading to September 2006.

Over-collateralisation for Series-A increased to 72.7% at September 2006, from 39.4% in May 2005, on account of prepayments and the excess interest spread being fully utilised to reduce the outstanding principal of Series-A PTCs.

The collateral quality of the pool remained fairly even during the period under review, with performing loans (defined as loans in arrears for less than 90 days) consisting of 95% of the total pool principal at September 2006, against 96% in May 2005.

Defaulted loans (defined as loans in arrears for over 365 days) remained low, ranging from 0% to 0.23% of the outstanding pool principal during the period.

Although HDFC has not repurchased defaulted loans as per the conditions of the offer documents, given the negligible percentage of loans in this category and the high over-collateralisation.

Fitch does not view this as a serious concern at this point.

The Credit Cover Multiple (“CCM”) for Series-A has gradually increased to 2.86x in September 2006 from 2.48x at May 2005.

CCM indicates the available credit enhancement as a multiple of the stressed losses for the pool of assets calculated using stress factors for the current rating category.

Consequent to the performance review, Fitch is of the view that the cash reserve of LKR99.1m (including interest accumulated of LKR10.8m) can be reduced down to LKR60.0m whilst maintaining the current rating.

A reserve of LKR60.0m covers stressed losses on the remaining pool of mortgages and would be adequate to service over four quarters of interest payouts of the Series-A notes, providing the transaction with adequate liquidity to make interest payouts to investors on a timely basis.

The CCM would only reduce to 2.49x once the cash reserve is reduced to LKR60.0m.

Fitch notes that if the current level of collection efficiency and the resulting EIS, together with the anticipated level of prepayments were to continue, the Series-A PTC’s would be redeemed far ahead of its scheduled redemption date of 14 April 2014.