IIFL Finance Limited

Rating reaffirmed at ‘CRISIL PP-MLD AA+r (CE)’ for Principal Protected Market Linked Debentures

 

Rating Action:

Instrument Details	Amount Rated (Rs Cr)	Outstanding Amount (Rs Cr)*	Original Tenure (Days)	Ratings @	Rating Action
Principal Protected Market Linked Debentures^	400.00	284.52	734	CRISIL PP-MLD AA+r (CE)/Stable	Ratings reaffirmed

@The ‘CE’ suffix for instruments having explicit Credit Enhancement is in compliance with SEBI’s circular dated June 13, 2019.

*After January 2021 payouts

^Transferred from India Infoline Finance Ltd

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL PP-MLD AA+r (CE)/Stable’ rating for Principal Protected Market Linked Debentures (PP-MLDs) of India Infoline Finance Ltd (India Infoline Finance ; part of IIFL Finance group) which has been transferred to IIFL Finance Ltd. (IIFL; CRISIL AA / CRISIL PP-MLD AAr / Negative / CRISIL A1+), post amalgamation

 

The payouts to MLD holders are supported by the following:

• Internal accruals of IIFL, which is the primary obligor
• Unconditional and irrevocable guarantee (SPV guarantee) provided by Eminent Trust November 2019, a Special Purpose Vehicle (SPV) to which IIFL assigned gold loan receivables. The cash flows from the assigned receivables are be utilized exclusively for making payouts to the MLD-holders on invocation of SPV guarantee
• A bank guarantee of Rs 27.92 crore (7.0% of issue size) available to be invoked on the maturity date, if the assigned gold loan receivables, along with payments made by the issuer, are insufficient to make promised payouts to the MLD-holders

 

For the revolving period i.e. first 12 months from issuance, the SPV had utilized cash flows realized from assigned gold loan receivables to acquire additional gold loan assets from IIFL, conforming to the pre-defined eligibility criteria. This resulted in increase of principal cover of the gold loan receivables assigned to Eminent Trust November 2019 from 1.25 times to 1.53 times as of November 2020 (end of revolving period). Subsequently, the three payouts have been made to the investors. As after January 2021 payouts, the PP-MLD outstanding is 284.52 crore against pool principal of 517.21 Cr, out of which 100% are current.

 

Upon full repayment of principal, interest will be paid out on a monthly basis to the extent cash is available with the SPV through collections from the underlying gold loan receivables. Entire principal and interest are promised to the MLD-holders only by the final maturity date (24 months from issue date). If the cash flows from the underlying receivables are not sufficient to pay the principal/interest by the final maturity date, cash collateral/third party guarantee will be used to ensure timely payment to the MLD holders.

 

Analytical Approach

CRISIL Ratings has applied its criteria on rating asset-backed securities and instruments backed by guarantees for rating the MLDs. The (CE) suffix reflects the payment structure that is designed to ensure full and time-bound payment to MLD-holders.

 

Rating Assumptions

To assess the likely base case shortfalls on the assigned gold loan receivables, CRISIL Ratings has analysed the moving portfolio delinquencies and the static pool information for gold loan portfolio of IIFL for the periods FY 2017 to September 2020 (with performance data till September 2020). The coincidental 90+ dpd for the gold loan portfolio of IIFL was 0.1% as of September 2020.

CRISIL Ratings has also factored in pool specific characteristics and has estimated the base case shortfalls in the pool by the maturity of the transaction to be in the range of 5% - 8% of pool principal. 

Based on its assessment of IIFL's short-term credit risk profile, CRISIL Ratings has factored in the risk arising out of commingling of cash flows. CRISIL Ratings has adequately factored in the risks arising on account of counterparties. CRISIL Ratings has run sensitivities based on various shortfall curves (front-ended, back-ended and normal) and has adequately factored the same in its analysis.

The interest payouts to the MLD holders will depend on the price of 7.26 G-Sec 2029, CRISIL Ratings has considered yield of 9.0% XIRR for its analysis.

Key Rating Drivers & Detailed Description

Strengths:

• Total support available in the structure
  • Three layers of protection are available to the MLD holders. IIFL(rated CRISIL AA / CRISIL PP-MLD AAr / Negative / CRISIL A1+) is the primary obligor. In case IIFL is not able to make the payments to MLD holders from its internal accruals, the unconditional and irrevocable SPV guarantee provided by Eminent Trust Novemer 2019 will be invoked. Further, another third-party guarantee of 27.92 crore (7.0% of issue size) is available to make good any shortfalls in payouts required to redeem the MLDs by the final maturity date.

 

Weakness:

• Impact on asset quality
  • The magnitude of resultant asset quality implications on retail gold loan asset class due to lower than expected recoveries from overdue contracts and losses incurred in auction process are key monitorables.

Liquidity: Strong

Liquidity is strong given the total support available to pay the MLD holders. Furthermore, while principal and interest payouts are promised to the investors on an ultimate basis only, the actual payout to the investors will be accelerated as they have started receiving the payments starting 13th month post issuance. The absence of monthly promise in terms of interest and principal payouts enables the structure to withstand temporary liquidity challenges, if any.

Outlook: Stable

The outlook is based on CRISIL Ratings’s evaluation of the cover available to the PP-MLD holders.

Rating Sensitivity factors

Upward factors:

• Introduction of supportive legislations or regulations for covered bonds
  • CRISIL Ratings had received a legal opinion confirming the bankruptcy remoteness of the assigned gold loan receivables from the Issuer. However, currently, there is no supportive regulatory or legislative framework for covered bonds in the country and judicial precedence on the subject is non-existent.
  • Performance of the assigned pool of receivables
  • Substantially better than expected performance of the underlying contracts in the pool resulting in collateral cover exceeding 3.5 times the estimated base shortfalls of the assigned gold loan receivables

 

Downward factors:

• Total external support available to the MLD holders falling below 2.0 times the estimated base case loss of the gold loan receivables of Eminent Trust November 2019
• A sharp downgrade in the rating of the servicer/originator
• Non-adherence to the key transaction terms envisaged at the time of the rating

Adequacy of credit enhancement structure

The guarantees provided by the SPV and the third-party are unconditional, irrevocable and cover the entire rated amount. Trustee monitored payment mechanism is in place to ensure payment of interest and principal obligation on the rated debt by the maturity of the MLDs. The payment mechanism provides adequate timeline for the guarantor to make full and timely payments in case of default by the issuer.

 

Based on the eligibility criteria, trigger events and historical performance of gold loan portfolio of IIFL, CRISIL Ratings had tested the adequacy of the quantum of credit enhancement, CRISIL Ratings believes that the level of credit enhancement is sufficient even under highest stress scenario. While building stress scenarios, CRISIL Ratings has assumed deterioration in performance of the issuer, significantly weaker performance of the pool as compared with the base case portfolio performance and highest payable rate to the MLD holders. CRISIL Ratings believes that the instrument will have very high degree of safety regarding timely servicing of financial obligations even in the most likely stress scenario.

Unsupported ratings: CRISIL PP-MLD AAr

CRISIL has introduced 'CE' suffix for instruments having explicit Credit Enhancement feature in compliance with SEBI's circular dated June 13, 2019

Key drivers for unsupported ratings

The key rating drivers of the unsupported rating are detailed in CRISIL Ratings’s latest rating rationale on debt instruments issued by IIFL.

 

Counterparty Details

Capacity	Counterparty Name	Counterparty Rating / Track record	Effect on credit ratings in case of non-performance
Issuer/ Servicer	IIFL	‘CRISIL AA / CRISIL PP-MLD AAr / Negative / CRISIL A1+’	Significant effect, because of change in servicing quality and replacement cost of servicer. However, CRISIL does not envisage the requirement for replacement.
NCD Designated account	HDFC Bank	‘CRISIL AAA / CRISIL AA+ / Stable’	Negligible effect. Account bank can be changed without impacting the rating.
SPV Account	ICICI Bank	‘CRISIL AAA / CRISIL   AA+/Stable’	Negligible effect. Account bank can be changed without impacting the rating.
Guarantee provider to the SPV	Punjab National Bank	CRISIL AA+ / CRISIL AA- /Stable/CRISIL A1+	Significant Effect, because rating on MLDs will be directly linked to long term rating of guarantee provider
Trustee	Catalyst Trusteeship Limited	Adequate Track Record	Negligible effect. Can be replaced at minimal cost.

 

About the Company

IIFL Finance is the listed holding company of the IIFL Finance group and is registered as a systemically important non-deposit-taking non-banking financial company (NBFC). The group offers various retail lending products, including gold loans, home loans, LAP, business loans, microfinance and capital market based lending (margin funding and loans against shares). It also offers construction and developer finance.

 

In fiscal 2008, IIFL Finance (erstwhile IIFL Holding Ltd) launched its retail finance business through the NBFC, Moneyline Credit Ltd, which was merged with India Infoline Finance Ltd effective April 2011. In fiscal 2009, India Infoline Housing Finance Ltd received registration as a housing finance company from the National Housing Bank and was subsequently renamed as IIFL Home Finance. In fiscal 2017, IIFL Finance ventured into microfinance after the acquisition of micro lender Samasta Microfinance.

 

In January 2018, IIFL Finance announced plans to reorganise its corporate structure, and list IIFL Finance (loans and mortgages business), IIFL Wealth (wealth and asset management business), and IIFL Securities (capital markets and other businesses). As part of the restructuring scheme, IIFL Wealth and IIFL Securities were demerged from IIFL Finance in May 2019 and were listed in September 2019. In March 2020, India Infoline Finance Ltd was merged into IIFL Finance, the listed entity of the lending business.

 

As of September 30, 2020, promoters held 24.9% stake in IIFL Finance, while 29.9% is held by Prem Watsa controlled Fairfax Holdings and 15.5% by CDC Group PLC.

 

CRISIL has also analysed the standalone financials of IIFL Finance. The company reported a total income (net of interest expenses) and profit after tax (PAT) of Rs 1,385 crore and Rs 149 crore, respectively, in fiscal 2020, against Rs 1,597 crore and Rs 451 crore, respectively, in the previous fiscal. For the half year ended September 30, 2020, the company reported a total income (net of interest expenses) and profit after tax (PAT) of Rs 777 crore and Rs 57 crore, respectively, against Rs 673 crore and Rs 67 crore, respectively, in the corresponding period of the previous fiscal.

 

The company had networth and total assets of Rs 3,661 crore and Rs 18,985 crore, respectively, as on September 30, 2020. 

 

IIFL Finance (consolidated) had total income (net of interest expenses) and PAT of Rs 2,424 crore and Rs 503 crore (including one-time exceptional expense of Rs 261 crore (post tax), respectively, in fiscal 2020 as against a total income (net of interest expense) of Rs 2,500 crore and PAT of Rs 796 crore (including one-time exceptional gain of Rs 105 crore) in the previous fiscal. Excluding the exceptional items (gain and expenses), PAT stood at Rs 764 crore for FY20 as against a PAT of Rs 691 crore in the previous fiscal. For the half year ended September 30, 2020, the company had a total income (net of interest expenses) and profit after tax (PAT) of Rs 1,477 crore and Rs 245 crore, respectively, against Rs 1,203 crore and Rs 262 crore, respectively, in the corresponding period of the previous fiscal.

Key Financial Indicators (Consolidated; CRISIL adjusted numbers)

As on / for the period ended		Mar-20	Mar-19
Total Assets	Rs crore	34,341	33,239
Total income (net of interest expenses)	Rs crore	2,424	2,500
Profit after tax^	Rs crore	503	796
Gross NPA	%	2.31	1.96
Return on managed assets (annualized)^	%	1.2	2.1
Gearing	Times	5. 2	5.9
Adjusted gearing	Times	7.7	8.0

 Excluding the one-time exceptional items, PAT and RoMA stood at Rs 764 crore and 1.8%, respectively, for fiscal 2020 as against Rs 691 crore and 1.9%, respectively, for fiscal 2019

 

IIFL Finance (standalone; CRISIL adjusted numbers)

As on / for the period ended		Mar-20	Mar-19
Total income (net of interest expenses)	Rs crore	1,385	1,597
Profit after tax	Rs crore	149	451
Gross NPA	%	3.1	3.4
Gearing	Times	3.3	3.6
Adjusted gearing	Times	4.7	4.3

 

List of covenants

Key trigger events for evocation of SPV guarantee 

Parameter	Criteria as per current structure
Issuer payment obligation	Issuer doesn't fund the account with amount payable to the MLD holders by 11 am on the Funding Date
Issuer rating	Rating downgrade of issuer to A+ or lower
Security cover	The issuer is unable to maintain the required security cover (principal for contracts with principal overdue for more than 90 days not to be included for security cover calculations)
OD contracts in 0-90 bucket	Maximum 5% contracts in 0-90 bucket and out of these max 3% in 60-90 bucket, these will be included for the security cover calculation

 

Key eligibility criteria for gold loan contracts in the revolving period: -

Parameter	Criteria as per current structure
Asset class	100% gold loan receivables
Seasoning	Minimum seasoning of 3 month
Tenure	Maximum tenure of 11 months
Residual Tenure	Minimum WA residual tenure of 6 months
Interest rate	Minimum rate on the pool of 15% and weighted average rate on the pool of 18.0%
LTV of contracts	Max 75% LTV
Geographical concentration	Max 25% per state
Borrower concentration	Max 1% per borrower
Overdue status	No contracts in overdue at the time of assignment

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

Type of Instrument	Rated Amount (Rs Cr)	Date of Allotment	Maturity Date #	Complexity Level	Coupon Rate (%) (annualised)	Outstanding Ratings
PP-MLDs	400.00	19-Nov-2019	22-Nov-2021	Highly Complex	Linked to 7.26 G-Sec 2029 index*	CRISIL PP- MLD AA+r (CE)/Stable

1 crore = 10 million

#Actual maturity will depend on the collections from the gold loan pool.

*If price of 7.26 G-Sec 2019 falls below 50% of the rate at the time of issuance of MLDs, then interest rate on MLDs is 0.0%, else if price of 7.26 G-Sec 2019 stays above 50% of the rate at the time of issuance of MLDs, then interest rate on MLDs is 9.0% XIRR