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What is a PTC?

what is a pass through certificate

Lisa Mary Thomson, ET Bureau Apr 12, 2009, 04.51am IST

A pass through certificate (PTC) is a certificate that is given to an investor against certain mortgaged-backed securities that lie with the issuer. The certificate can be compared to securities (like bonds and debentures) that may be issued by banks and other companies to investors.

The only difference being that they are issued against underlying securities. The interest that is paid to the issuer on these securities comes to the investor in the form of a fixed income.

Investors in such instruments are usually financial institutions like banks, mutual funds and insurance companies. However, to understand this better, you need to delve a little deeper into how exactly the assets are securitised.

What is securitisation?

Many banks and private organizations have incomes or receivables that are due to them in lieu of loans or services that they have offered in the past. Securitisation involves the conversion of these incomes or receivables into debt instruments which are then sold to investors. For this purpose, the parent organization sets up a Special Purpose Vehicle (SPV) which issues these debt instruments.

By making these debt instruments available in the markets, the organization manages

to make their assets liquid and can then use the funds for some other productive business. When an investor buys these debt instruments, the investor is given a PTC. However, this does not mean that the investor owns the assets. Rather, when the original lender recovers money from the original borrower (as interest or otherwise), it is then passed on to the SPV, which then disburses it to the investor in the form of a fixed income.

What is the difference between pass through certificates and pay through certificates?

In a pass through certificate, interest earned on the receivable is directly passed to the holders, whereas, in a pay through certificate, interest received from the receivables is not passed to the holder of the unit. Instead, the SPV issues new securities to them.

Why are PTCs important? Why are they in the news?

All the PTCs in the market are rated by agencies like Crisil or Fitch ratings, among others. The ratings tell the investor about the quality of the underlying securities. However, PTCs have recently been in the news after Crisil downgraded the ratings of PTCs issued by Wockhardt. The main reason given for this is that Wockhardt defaulted on the interest payment on its PTCs.

Category: Insurance

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