Fitch affirms HDFC Home Loan Securitisation Trust 2005 series-A at ‘AA-(Lka)’

Fitch Ratings Lan- ka (Fitch) has 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), with a lower liquidity reserve of Rs. 50 million.

The rating addresses the timely payment of interest and the ultimate payment of principal on Series-A.

The PTCs are backed by a pool of residential mortgage loans that were originated by Housing Development Finance Corporation Bank of Sri Lanka (HDFC, rated ‘A(lka)’/Stable).

HLST is a special purpose vehicle created for the sole purpose of this transaction, and is managed by Deutsche Bank A.G. (Colombo Branch).

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 high over collateralisation, excess interest spread (EIS, defined as interest collected on the underlying pool less coupon interest paid on Series-A), a liquidity reserve (held at Citibank N.A - Colombo Branch), and the relatively strong credit quality of the underlying collateral.

Three quarterly pay outs have been made on the Series-A PTCs based on cash flows from the underlying pool of mortgage loans during the current review period (spanning the nine months from October 2006 to June 2007).

The outstanding principal on the Series-A PTCs have been paid out at a higher rate of 23.2% during the current review period compared with 18.6% during the nine months to end-September 2006 (9M06), due to the increase in prepayments reported on the underlying pool.

As per the “fast-pay” mechanism built into the transaction’s structure, any such prepayments and EIS is utilised to reduce the Series-A principal to the maximum possible extent, ensuring that investors derive the full benefit of all additional cash flows.

As a result, over collateralisation for the Series-A PTCs increased to 104.0% at end-June 2007, compared with 72.7% at end-September 2006, and 39.4% at 16 May 2005.

In total, the outstanding principal on the Series-A PTCs has been reduced by 48.7% to Rs. 259.6m as of the last pay out date at 16 July 2007.

The asset quality of the underlying pool deteriorated somewhat during the current review period. For example, loans that are over 90 days past the due date (90+ dpd) increased to 8.2% of the pool at end-June 2007, compared with 5.0% at end-September 2006.

However, loans 365+ dpd (treated as defaulted for the purpose of this transaction) reduced marginally to 0.20% from 0.23% during the period.

Fitch notes that HDFC has not repurchased such defaulted loans from the trust (to which the rights, title, and interest on the receivables were assig- ned) as per the transaction legal documents.

However, the agency doesn’t view this as a serious concern at present, as only a negligible percentage of the pool assets are in this category. Fitch also notes that the asset quality of the underlying pool is superior to that of HDFC’s overall mortgage portfolio.

This difference in asset quality is attributed to the “cherry-picking” of the securitised pool based on stringent selection criteria (such as improved borrower profile, loan purpose, geographic distribution of the asset, loan-to-value ratio, loan yield distribution, delinquency distribution etc.) in order to improve the robustness of the transaction’s cash-flows.