A story behind PTC
Borrowerji took a loan of Rs. 500 from Lenderji on EMI for five years. Lenderji did not want to wait for five years to get his money back. He asked his wife SPVji to find someone who will give him Rs. 350 now, in lieu of future EMIs from Borrowerji.
Lenderji transferred the assets on SPVji’s name, and got out of the picture. Now, SPVji went to Investorji and asked if he was interested in buying future EMIs of Rs. 500 for Rs. 350 now. Investorji found this as an opportunity to make good money and agreed.
SPVji then sold the cash flows of Borrowerji to Investorji and issued him a certificate, which entitled him to get periodic payments from Borrowerji. Now the cash flows from Borrowerji are directed through SPVji to Investorji.
Essentially, this is the story behind every PTC.
Defining PTC
PTC is a certificate given to an investor against an asset-backed security.These are fixed income instruments very similar to the debentures with the distinguishing feature, being that these are backed by an asset.
To understand the context in which a PTC is used, let’s see what securitization means.
Securitization, basically, is a process where a lender clubs various loans extended by him and re-divides it into smaller units so that they can be sold in the market. These units are called securities, and the process – securitization. The lender creates a separate entity called Special Purpose Vehicle (SPV), for this purpose. The assets are transferred from the books of the lender to the books of SPV. And when the SPV sells a security to an investor, it issues a PTC.
A PTC can be a pay-through certificate or pass-through certificate.
In case of a pass-through certificate, the investor gets a direct exposure on the performance of the securitized assets. This implies that the investor’s inflows are directly linked to borrower’s inflows. If there is a delay from the borrower, the investor gets delayed payment; if there is a prepayment from the borrower, then the investor gets the same.
In case of a pay-through certificate, the investor gets only a charge against the securitized assets; they do not get direct exposure. This implies that the investor’s inflows are not linked to borrower’s cashflows, but in case of default – investors can sell the underlying assets.
Hence, PTC is essentially a certificate issued by SPV against asset-backed securities.