Covered bonds should pick up with better knowledge: ICRA

New Delhi [India], June 26 (ANI): Covered bonds backed by a safety pool of gold and auto loans are finding favor with investors, rating agency ICRA said.

A covered bond is a collection of loans issued by banks and then sold to a financial institution for resale.

In FY21, national covered bond issuance saw a sharp increase to around Rs 2,220 crore from Rs 400 crore in the previous year.

These bonds were issued by non-bank financial corporations (NBFCs) – nine in FY21 versus two in FY20. High net worth individuals (HNIs) and family wealth offices have invested in many emissions.

“Through covered bond structures, entities are able to reduce risk to investors by providing a proprietary hedging pool of assets assigned to a trust, thereby helping them to improve their credit ratings to meet the categories of double A or triple A rating, ”said Abhishek Dafria, vice president and group head of structured finance ratings at ICRA.

Issuers benefited from lower coupon rates on covered bond issues due to the higher credit rating with a coupon reduction of between 0.5 and 1.25 percent.

However, coupon rates always remain above the benchmark yield for the enhanced rating category due to the new nature of the product and the limited size of the market.

“We expect premiums to gradually decrease as the size of the covered bond market increases through increased stakeholder awareness and broader investor participation,” said Dafria.

Covered bonds have been better accepted in the Indian market, mainly in the second half of FY21, as they offer a dual benefit to an investor. The repayment obligation must be fulfilled by the entity. In the event of non-compliance, by a pool of assets assigned to a trust.

Given the uncertainty on recoveries due to the pandemic, the protection offered to an investor of a covered bond is improving compared to traditional securitization of the asset pool.

ICRA said a majority of covered bond issuance (almost two-thirds) so far has been in the form of market-linked bonds.

Rachit Mehta, Associate Vice President and Sector Head of Structured Finance Ratings, said that for the covered bond market to grow significantly, the involvement of other categories of investors remains essential, such as mutual funds and insurance companies, which have the capacity to participate in large -size emissions. (ANI)