CDOs to ease infrastructure financing

NEW DELHI: The financing of infrastructure projects may become easier because of increased use of collateralised debt obligations (CDOs). ���

The Deepak Parekh committee report is looking at various debt instruments for tapping capital markets to finance infrastructure projects. CDO is one such instrument,��� a government official in the finance ministry said.

CDOs are asset-backed securities which enable banks to transfer credit risks among a number of investors. These assets called collateral���usually comprise loans or debt instruments. Put simply, a single investor lending to several infrastructure projects can pool all the project loans (shown as assets on the books) by structuring a CDO and selling it in the market.

This will enable the investor to offload his credit risk to a host of other investors. Investors bear the credit risk of the collateral. The originator of the CDO will establish a special purpose vehicle to hold collateral and issue securities.

While the government is keen on tapping such credit instruments to boost infrastructure financing, experts say that a well-developed debt market is essential for such instruments to pick up. collateralised debt obligations involving infrastructure projects will require investors who are willing to take long-term risk exposures since loans for infrastructure projects are long term with maturity periods ranging between 5-20 years. ���CDOs can emerge as a good financial tool for funding infrastructure projects.

However, one needs a well-developed secondary market for credit derivatives to pick up well. CDOs have been used extensively in the US and Europe too,��� S Rajaram, head of structured finance analytics, ICRA told ET.

CDOs can be of two kinds���cash CDOs and and synthetic CDOs. In the case of cash CDOs, all the loans are packaged into an SPV and the SPV is sold in the market thereby protecting the original investor in the case of a payment default.

Synthetic CDOs are issued when the original investor buys credit risk protection by selling credit default swaps to the buyer, thereby offloading the risk in the event of a default without transferring the loan asset from the original investor���s balance sheet.

���India has not seen significant collateralised debt obligations transactions, since rating of the underlying pool becomes a critical issue with investors. What happens is that the rating of the pool is prejudiced by the rating of the weakest credit in the pool which adversely affects the possibility of an efficient pricing,��� Abhay Rangnekar, MD and head project finance (South Asia), StanChart, said. ���Currently, only single loan securitisation have been concluded, wherein the assessment of the underlying credit is more specific,��� he added.