Tata Fixed Tenure Fund Series - 2 Scheme B - Securities and ...

TATA FIXED TENURE FUND SERIES 2
In pursuance to SEBI communication dated 25.8.2010, given below are the requisite details relating to investments in Securitised debt.
1. Risk profile of securitized debt vis a vis risk appetite of the scheme:
Securitized Debt is a financial instrument (bond) whose interest and principal payments are backed by an underlying cash flow from another asset. In
line with the investment strategy of the Scheme and considering that there would be no intermediate redemption pressures for the Fund Manager, the
Scheme may take exposure to rated Securitized Debt with the intent to enhance portfolio yield without compromising on credit quality. Exposure to
Securitized Debt in the Scheme/Plan will be limited to papers with maturity not exceeding the maturity of the Scheme/Plan. Further as a prudent
measure of risk control, Investment in Securitized Debt will not exceed 50% of the net assets of the Scheme.
2. Policy relating to originators based on nature of originator, track record, NPAs, losses in earlier securitized debt, etc
The Policy relating to evaluation of the originators is as under:
• Track record
• Willingness to pay, through credit enhancement facilities etc.
• Ability to pay
• Business risk assessment, wherein following factors are considered:
- Outlook for the economy (domestic and global)
- Outlook for the industry
- Company specific factors
Track record
We ensure that there is adequate past track record of the Originator before selection of the pool including a detailed look at the number of
issuances in past, track record of issuances, experience of issuance team, etc. We also look at the credit profile of the Originator for its own
debt. We normally invest only if the Originator’s credit rating is at least ‘AA’ (+/- or equivalent) or above by a credit rating agency recognized by
SEBI.
Willingness to pay
As the securitized structure has underlying collateral structure, depending on the asset class, historical NPA trend and other pool / loan
characteristics, a credit enhancement in the form of cash collateral, such as fixed deposit, bank guarantee etc. is obtained, as a risk mitigation
measure.
Ability to pay
This assessment is based on a detailed financial risk assessment.
A traditional SWOT analysis is used for identifying company specific financial risks. One of the most important factors for assessment is the
quality of management based on its past track record and feedback from market participants. In order to assess financial risk a broad
assessment of the issuer’s financial statements is undertaken to review its ability to undergo stress on cash flows and asset quality.
Business risk assessment, wherein following factors are considered:
- Outlook for the economy (domestic and global)
- Outlook for the industry
- Company specific factors
In addition a detailed review and assessment of rating rationale is done including interactions with the company as well as agency.
Typically we would avoid investing in securitization transaction (without specific risk mitigant strategies / additional cash/security collaterals/
guarantees) if we have concerns on the following issues regarding the originator / underlying issuer:
• High default track record/ frequent alteration of redemption conditions / covenants
• High leverage ratios - both on a standalone basis as well on a consolidated level/ group level. This is very important in case of single
borrower loan sell down
• Higher proportion of re-schedulement of underlying assets of the pool or loan
• Higher proportion of overdue assets of the pool or the underlying loan
• Poor reputation in market
• Insufficient track record of servicing of the pool or the loan
3. Risk mitigation strategies for investments with each kind of originator
Risk Mitigation Strategies
Investments in securitized debt will be done based on the assessment of the originator which is carried out by the Fixed Income team based
on the in-house research capabilities as well as the inputs from the independent credit rating agencies.
In order to mitigate the risk at the issuer/originator level, the Fixed Income team will consider various factors which will include:
• size and reach of the originator
• the infrastructure and follow-up mechanism
• quality of information disseminated by the issuer/originator; and
• the Credit enhancement for different type of issuer/originator
• the originator’s track record in that line of business
9