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The complete rating action is as follows:
Issuer: Shri Trust U 2018
INR7,337,457,904.50 Series A PTCs, Baa3 (sf) Assigned
The rating addresses the expected loss posed to investors by the legal final maturity. The structure provides for timely payment of interest and principal.
Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant impact on yield to investors.
This transaction is a securitization of a static pool of CV and tractor loans originated by Sundaram in India.
The pool predominantly comprises medium and heavy commercial vehicle loans, aggregating to about 83% of the initial pool principal, and is geographically diversified as it is spread across 16 states, with the top 3 states contributing around 56.7% of the initial pool principal.
The pool has an average loan ticket size of INR1.46 million, a weighted average loan to value of 83.5% and, on account of seasoning, average principal amortization since origination is 21.2%. The contracts that are current -- as of the pool cut-off date -- contribute about 98.1% of the initial pool principal.
The rating on the PTCs will exhibit some linkage to the credit quality of Sundaram. The linkage is based on the fact that the Issuer relies heavily on Sundaram to continue servicing the securitized pool to meet its scheduled interest and principal payments to PTC holders.
Sundaram's servicing involves the collection of loan payments -- in different forms, such as auto-debits, post-dated cheques, in person, and in cash and cheques - from the borrowers, who are in turn located across India. Accordingly, any disruption to Sundaram's operations would significantly disrupt the collection of loan payments and would negatively impact the trust's own payments to PTC holders.
Even though the Issuer may appoint a successor servicer (following certain servicer replacement events or default events), this process of replacement will likely prove lengthy and costly, with potential disputes with borrowers over loan payments.
In assigning the rating, Moody's analysis focused among other factors on the following:
(1) The characteristics of the securitized pool;
(2) The historical performance of similar types of loans originated by the originator;
(3) The credit quality of the originator;
(4) The probability of operational disruption upon originator default;
(5) The size of liquidity facilities and credit enhancement to support timely payments on the PTCs, against the risk of defaults and arrears in the securitized pool and/or the originator;
(6) The readiness of the trustee to carry out remedial actions to minimize commingling risk and potential set-off risk, following a servicer replacement or default event;
(7) The macroeconomic environment; and
(8) The legal and structural integrity of the transaction.
Moody's considered, among other things, the following key strengths of the transaction:
(1) The experience of the originator in underwriting and servicing the underlying loans in India;
(2) The high granularity of the pool with 6,354 loans;
(3) The favorable terms of the loans, namely equal monthly instalments with an 83.5% weighted-average loan-to-value ratio at loan origination;
(4) The transaction has a static pool of loans. As a result, it is only exposed to the default risk of the loans in the cut-off pool - which have a remaining tenor of 52 months - and to the operational risk of the servicer during the life of the portfolio;
(5) The transaction benefits from two main sources of credit enhancement: (a) the 7.5% of credit facility at closing; and (b) excess interest collections from the pool - after payment of the interest on the notes in each period - can be used to top up the previously drawn credit facility to its original target amount.
(6) The originator has a strong alignment of interest with noteholders.
According to minimum retention requirements from the Reserve Bank of India, the originator has to retain a 10% exposure in the deal.
Moody's has also considered the transaction's following key weaknesses, which, in some cases, could lead to linkage between the rating on the PTCs and the credit quality of the originator:
(1) A back-up servicing arrangement was not set up at closing. Servicing of the transaction may be subject to disruption if the originator/servicer fails to perform when needed. A servicing disruption would negatively impact collections because the transaction has over 5,700 obligors located in various parts of India, and there is a limited number of viable replacement servicers in India capable of covering such a geographic spread and conducting the collection of loan payments from borrowers in person and in cash, should the originator default.
(2) Commingling risk with servicer's fund: The servicer would collect loan payments from borrowers every month, and commingle such collections with its own funds. Therefore, this amount will be subject to commingling risk until the servicer transfers such collections to the issuer's trust account on a specified date in the following month, which is on the PTCs' monthly payment date. Moody's has considered in its analysis the credit quality of the servicer and the readiness of the trustee or its designated agent in notifying the borrowers that their loans were assigned to the trust and that loan payments should be paid to the trust. Moody's has also incorporated two months of cash commingling exposure in the transaction modeling.
(3) Limited liquidity buffer: The trust can draw money from the credit facility up to 7.5% of the initial portfolio amount when there is a shortage of funds to pay interest payments and scheduled principal amortization payments to noteholders. In a scenario where the servicer is not performing, and the trust is not able to receive any loan payments from the borrowers or the servicer for a prolonged period, this amount of initial liquidity coverage appears weak, because the full amount of the credit facility may be used up rapidly to cover both interest and principal payments.
MAIN MODEL ASSUMPTIONS:
Moody's has assumed a mean loss rate of 3.35% and a coefficient of variation of loss of 70% for the securitized pool. These assumptions are made according to Moody's analysis of the characteristics of such pools, their historical performance, as well as Moody's view on India's social and macroeconomic environment and risks, as reflected in its long-term local currency country ceiling of A1.
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