IFMR Capital and Equitas Micro Finance India have completed the first rated microfinance loan backed securitization in the country. The deal's principal amount of passthrough certificates totaled to Rs. 157 million.

The underlying loan portfolio comprises Equitas-originated priority sector urban micro loans with a final maturity in October 2010.

IFMR Capital structured and arranged the innovative securitization transaction after a comprehensive analysis of Equitas and the loan portfolio, based on its underwriting guidelines.

Credit Rating Information Service of India (CRISIL) rated the Series A1 and Series A2 passthrough certificates, 'AA(so)' and 'BBB(so)', respectively.

The PTCs will be issued by a special purpose vehicle called IFMR Trust Pioneer I, which was set up specifically for this securitization. The securities are backed by microfinance loan receivables that were originated by Equitas.

IFMR Capital, the sole structurer and arranger, provides mezzanine financing in the form of an investment in 100% of the 'BBB(so)' rated Series A2 securities while the 'AA(so)' rated securities have been fully underwritten by a bank investor.

For credit enhancement, Equitas provided a first loss facility in the form of cash collateral equal to 11.7% of the principal amount of the portfolio.

This cash collateral together with the excess interest spread being trapped in the SPV are used to cover any repayment shortfalls on the 'AA(so)' and 'BBB(so)' securities.

The investors in the 'AA(so)' rated Series A1 PTCs are further protected by the junior 'BBB(so)' rated Series A2 PTCs, which comprise 20% of the issue size.

The deal was structured so that the interests of all parties, including the originator, Equitas, the structurer and mezzanine finance provider, IFMR Capital and the senior bank investor,  are aligned.

According to a press release on the deal, although unrated microfinance loan portfolio buyouts have been a common source of financing for some MFIs, the deal is the first rated securitization of microfinance loans from the country. Thus it is expected to open up new sources of capital, including mutual funds, foreign banks and NBFCs, for microfinance institutions.

The senior 'AA(so)' rated series A1 PTCs has elicited strong interest from domestic banks, which find this security attractive from a risk-return perspective.

Furthermore, with the implementation of the new Basel II capital adequacy regime in 2010, banks will find more and more value in these rated micro finance loan securitized PTCs, the release said.

"The deal is in tune with IFMR Capital's goal of "creating valuable new asset classes, increasing marketability of asset classes to a broader universe of investors and expanding access to capital for micro-finance institutions," said Sucharita Mukherjee, senior vice president, IFMR Trust and CEO, IFMR Capital. "This will be the blueprint for further securitisations and a benchmark for other MFIs," she added.

"This rated securitization transaction will help Equitas diversify its sources of funding and enable Equitas to offer micro-credit at reduced cost to a larger section of the population," S. Bhaskar, COO, Equitas said

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