Moody's assigns rating to Shriram-sponsored auto loan ABS in India: Sansar Trust Mar 2018

Moody's Investors Service has assigned a defintive rating to the Series A pass-through certificates (PTCs) issued by Sansar Trust Mar 2018, an ABS transaction backed by a static pool of commercial vehicle and construction equipment loans originated by Shriram Transport Finance Company Ltd. (STFCL).

The complete rating actions are as follows:

Issuer: Sansar Trust Mar 2018

.... INR 8,003,902,515 Series A PTCs, Baa2 (sf) Assigned

The trust has issued one series of PTCs, namely, Series A PTCs. The rating addresses the expected loss posed to investors by the legal final maturity. The structure allows for the timely payment of interest and repayment of principal of the rated notes by the legal maturity date.

 

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 yields to investors.

RATINGS RATIONALE

The rating is based on the quality of the underlying collateral and its expected performance, the strength of the capital structure, and the experience and expertise of STFCL as the servicer.

This transaction is a securitization of a static pool of commercial vehicle and construction equipment loans originated by STFCL in India. At closing, STFCL assigned a pool of mostly pre-owned vehicle loans, together with its security interest over the underlying vehicles, to the issuer. The pre-owned vehicle loans contribute 88.1% of the initial pool principal, with the remaining 11.9% of the initial pool principal contributed by new vehicle loans.

The underlying loans have a fixed rate and are fully amortizing in nature. Whereas, the investor coupon on the PTCs is benchmarked to HSBC Bank's (India) one-year Marginal Cost of Funds based Lending Rate (MCLR). The spread over one-year MCLR is minus (-) 133 basis points, to be reset annually, with a floor of 6.97% and cap of 7.47%.

The rating on the notes will exhibit some linkage to the credit quality of STFCL. The linkage is based on the fact that the issuer, Sansar Trust Mar 2018, relies heavily on STFCL to continue servicing the securitized pool to meet its timely interest payments and principal amortization payments to noteholders.

STFCL's servicing involves the collection of loan payments in person from the borrowers who are located across India, with repayments predominantly made in cash. Accordingly, any disruption to STFCL's operations would significantly upset the collection of loan payments and, in turn, affect 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 will likely prove lengthy and costly, involving potential disputes with borrowers over loan payments.

When assigning the ratings, Moody's analysis focused, among other factors, on the following:

(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 has considered, among other things, the following key strengths of the transaction:

(1) The long and nationwide franchise, leading market position, and experience of the originator in underwriting and servicing, particularly in the pre-owned/used commercial vehicle segment in India;

(2) The high granularity of the pool with 16,683 loans;

(3) The favorable terms of the loans, namely equal monthly instalments with a 69.5% 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 weighted-average remaining tenor of about 43.5 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 5.0% first-loss credit facility (FLCF) and the 4.50% second-loss credit facility (SLCF) 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. The FLCF and SLCF will be held at banks which are rated at least Baa3 and have a replacement trigger linked to the rating of the same banks; and

(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 key weaknesses, some of which lead to some linkage between the ratings on the notes and the credit quality of the originator: In particular, Moody's notes the following factors:

(1) A back-up servicing arrangement was not set up at closing. Servicing of the transaction could be subject to disruption if the originator/servicer fails to perform when needed. A servicing disruption would negatively impact collections because the transaction has more than 16,600 contracts 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) Limited liquidity buffer: The trust can draw money from two credit facilities up to a total of 9.50% 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 facilities could 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 cheques, with its own funds. This amount will therefore 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 four 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. Moody's has also incorporated two months of cash commingling exposure in its transaction modeling.

MAIN MODEL ASSUMPTIONS

Moody's has assumed a mean loss rate of 4.70% and a coefficient of variation of loss of 62.5% 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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