The complete rating action is as follows:
Issuer: India Standard Loan Trust - XLIV
.... INR 297,503,981.66 Series A1 Pass Through Certificates, Baa3(sf) Assigned
.... INR 725,238,447.13 Series A2 Pass Through Certificates, Baa3(sf) Assigned
The rating addresses the expected loss posed to investors by the legal final maturity. The structure allows for timely payment of interest and repayment of principal of the rated notes by the legal maturity date.
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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.
RATINGS RATIONALE
This transaction is a securitization of a static pool of commercial vehicle (CV) loans and Micro SME loans (MSME loans; typically secured business loans with a value below INR2.5 million extended to MSME, guaranteed by business owners and secured by mortgages over immovable properties) originated by Au Financiers in India.
The CV loans and secured MSME loans contribute 78.52% and 21.48% of the initial pool principal, respectively. At closing, Au Financiers assigned a pool of these asset-backed loans, together with its security interest over the underlying vehicles and properties, to the issuer. All the MSME loans in the underlying pool are secured by mortgages over residential or commercial properties.
Au Financiers started disbursing MSME loans in April 2010. However, a large proportion of the MSME loans were originated 2013 onwards, reflected by the fact that the MSME loan portfolio grew to INR 23.16 billion as of June-2016 from about INR 5.98 billion as of June-2013. The resultant limited historical performance information may not be sufficient to fully reflect the future performance of the portfolio.
In addition, there is limited performance data available for this asset class at an industry level, and the typical tenure of such loans of 4-7 years means that the performance data does not reflect a full cycle. Whereas, for the early vintages, like 2010, for which the loans have seen full cycle, the disbursements were insignificant and can't be relied up on fully to reflect the performance of recent vintage loans.
As a result, Moody's has used a mean loss rate assumption of 6.50% for the MSME loans, compared to a mean loss rate assumption of 4.50% for the CV loans, although the performance of the MSME loans has thus far shown significantly lower losses than CV loans. Moody's recovery assumption is 0% for both loan types.
All the underlying loans carry a fixed interest rate, with fixed installments and servicing on both the principal and interest on a monthly basis. The weighted average seasoning of the CV loans and the MSME loans is 7.0 months and 10.7 months, respectively.
The rating on the notes will exhibit some linkage to the credit quality of Au Financiers. This is because the issuer, India Standard Loan Trust - XLIV, relies heavily on Au Financiers to continue servicing the securitized pool to meet its timely interest payments and scheduled principal amortization payments to noteholders.
Au Financiers' servicing involves the collection in person of loan payments from the borrowers who are located across India -- where Au Financiers operates. For CV loans, repayment is predominantly in cash, while the proportion of cash collection for MSME loans is significantly lower.
Accordingly, any disruption to Au Financiers' operations would significantly disrupt the collection of loan payments and, in turn, would negatively impact the trust's own payments to noteholders.
Even though the issuer may appoint a successor servicer -- following certain servicer replacement events or default events -- this process of replacement is expected to prove lengthy and costly, with potential disputes with borrowers over loan payments.
When assigning the rating, Moody's analysis focused, among other factors, on the:
(1) Characteristics of the securitized pool;
(2) Historical performance of similar types of loans originated by the originator;
(3) Credit quality of the originator;
(4) Probability of operational disruption upon originator default;
(5) Size of credit enhancement to support timely payments on the notes against the risks of defaults and arrears in the securitized pool and/or the originator;
(6) 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) Macroeconomic environment; and
(8) 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 granularity of the pool with about 2,304 loans, although we note that the top 20 loans represent 8.9% of the original balance;
(3) The favorable terms of the loans: equal monthly instalments with a 75.9% weighted average overall loan-to-value (LTV) ratio at loan origination, split between weighted average LTV ratios of 85.3% and 41.5% for the vehicle loans and secured MSME loans respectively;
(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 weighted average remaining tenor of about 39.8 months and a weighted average life of 22.1 months) and to the operational risk of the servicer during the life of the portfolio. The weighted average life for the MSME loans (29.2 months) is higher than that for the CV loans (20.20 months);
(5) The transaction benefits from two main sources of credit enhancement: (a) credit facilities equivalent to 9.35% of the original pool balance, composed of the 3.50% first-loss credit facility and the 5.85% second-loss 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 previously drawn credit facilities to their 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 (RBI), the originator has to retain 10% exposure in the deal.
Moody's has also considered the following key weaknesses of the transaction:
(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 about 2,304 loan contracts from various parts of India, and there are a limited number of viable replacement servicers in the country capable of covering such a geographic spread and conducting the collection of loan payments from borrowers in person and predominantly in cash, should the originator default.
(2) Limited liquidity buffer: The trust can draw money from two credit facilities up to a total of 9.35% 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, as the full amount of the credit facilities may be used up rapidly to cover both interest and principal payments.
(3) Commingling risk with servicer's fund: The servicer will designate staff for the collection of loan payments from borrowers every month, and commingle such collections, mostly in cash or cheque, 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 one business days prior to the notes' 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. We have also incorporated two months of cash commingling exposure in our transaction modeling.
(4) The transaction structure includes a liquidity facility sized at 1% of the initial pool principal. The liquidity facility will be applied to fund asset-side shortfalls in collections from loans, which are up to 90 days delinquent, and under which the security has not been repossessed.
When the liquidity facility is drawn, the liquidity facility provider shall have a claim over the future cash flows from the underlying assets senior to the claims of the most senior investor. A fee is charged by the liquidity facility provider for any utilization of this facility. It is paid at the top of the waterfall. Additionally, the liquidity facility shall not be utilized for payout on the final payout date.
Moody's notes that if the aggregate amounts available under the credit enhancement facility (first loss credit facility and second loss credit facility) fall below 10.0% of the initial amount of the credit enhancement facility, the liquidity facility shall not be utilized from the first payout immediately succeeding such occurrence and the liquidity facility will be withdrawn.
Moody's believes that as a result of this structural feature, in certain scenarios cash flows from the liquidity facility would be applied to fund asset short-falls from loans which are up to 90 days delinquent, resulting in additional cash being distributed to the originator at the bottom of the priority of payments compared to a transaction which does not include a liquidity facility. Moody's believes this feature weakens the transaction structure by placing additional reliance on the credit enhancement facility available to support the rated notes.
Moody's has modelled the negative impact of the liquidity facility by reducing the credit enhancement by the maximum drawdown amount and associated interest charges (equivalent to 1.66% of the original balance).
(5) About 21% of the underlying pool principal is backed by MSME loans which have a limited performance history and the loan amounts are relatively larger in comparison to the CV loans. Although, there are about 2,304 loan contracts in the pool -- there are only about 877 effective borrowers (assuming evenly sized exposure to the obligors). This has been factored into the mean loss rate assumption of 6.5% for the MSME loans. The underlying MSME loans are characterised by low LTVs (41.5%), relatively higher seasoning (10.7 months), and the loans have a fully amortising repayment term with fixed monthly installments.
Main Model Assumptions:
Moody's has assumed a mean loss rate of 5.00% , obtained as a weighted average of the assumed mean losses on the CV and MSME pools, 4.50% and 6.50% respectively, and a coefficient of variation of loss of 65% for the securitized pool.
These assumptions are made according to Moody's analysis of the characteristics of such pools, their historical performance, and its current view on India's social and macroeconomic environment and risks, as reflected in its long-term local currency country ceiling of A1.
Factors That Would Lead To An Upgrade Or Downgrade Of The Ratings:
Factors that may cause an upgrade of the rating include (1) reduced operational and liquidity risks, including a significant improvement in the credit profile of the servicer and an increase in the liquidity coverage of the trust for a prolonged period; and (2) an improvement in the securitized pool performance.
Factors that may cause a downgrade of the rating include (1) increased operational and liquidity risks, including a significant deterioration in the credit profile of the servicer and the absence of mitigating actions by the trustee; or (2) a deterioration in the securitized pool performance.
The performance expectations for a given variable indicate Moody's forward-looking view of the likely range of performance over the medium term. Performance that falls outside the given range may indicate that the securitized pool's credit quality is stronger or weaker than what Moody's had previously anticipated.
STRESS SCENARIOS:
In rating auto loan ABS, loss rate and coefficient of variation of loss are two key inputs that determine the transaction cash flows in the cash flow model. Parameter sensitivities for this transaction have been tested in the following manner. Moody's tested nine scenarios derived from a combination of mean loss rate and coefficient of variation of loss: mean loss rate: 5.00% (base case), 6.00% (base case + 1.00%), and 7.00% (base case + 2.00%), and coefficient of variation of loss: 65% (base case), 67.5% (base case + 2.5%), and 70% (base case + 5%).
The model output for Series A1 PTCs would remain unchanged at Baa3, if (1) the coefficient of variation of loss assumption becomes 70% (instead of the assumed base case 65%), while keeping the mean loss assumption at 5.00%, but would change to Ba1, if (2) the mean loss assumption becomes 6.00% (instead of the assumed 5.00%), while keeping the coefficient of variation of loss assumption at 65%.
The model output for Series A2 PTCs would change to Ba1, if (1) the coefficient of variation of loss assumption becomes 70.0% (instead of the assumed base case 65%), while keeping the mean loss assumption at 5.00%, or, if (2) the mean loss assumption becomes 6.00% (instead of the assumed 5.00%) while keeping the coefficient of variation of loss assumption at 65%.
Parameter sensitivities provide a quantitative/model indicated calculation of the number of notches that a Moody's rated structured finance security may vary if certain input parameters used in the initial rating process differed. The analysis assumes that the transaction has not aged. It is not intended to measure how the rating of the security might migrate over time, but rather, how the initial model output for the senior notes might have differed if the two parameters within a given sector that have the greatest impact were varied. Results are model outputs, which are one of many inputs considered by rating committees, which take quantitative and qualitative factors into account in determining actual rating.
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