Mikkel Trust 12 2024

(Originator: Muthoot Microfin Limited)
‘Crisil AA+ (SO)’ for Series A1 PTCs converted from provisional rating to final rating

 

Rating Action

Tranche Name	Amount Rated (Rs.Crore)	Outstanding Amount (Rs.Crore)	Balance Tenure	Credit Collateral (Rs.Crore)	Ratings/Credit Opinions	Rating Action
Series A1 PTCs	68.24	60.19	19	5.52	Crisil AA+ (SO)	Converted from Provisional Rating to Final Rating

Note: None of the Directors on Crisil Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings.

1 crore = 10 million   

Refer to annexure for Details of Instruments & Bank Facilities

 

Detailed Rationale

Crisil Ratings has converted the provisional rating assigned to Series A1 Pass-Through Certificates (‘PTCs’) issued by ‘Mikkel Trust 12 2024’ to a final rating of ‘Crisil AA+ (SO)’. The PTCs were issued under a securitisation transaction originated by Muthoot Microfin Limited (MML; rated ‘Crisil A+/Stable’).

 

This transaction is backed by a pool comprising microfinance loan receivables originated by MML. The ratings are based on credit quality of the pool cash flow, origination, and servicing capabilities of MML, credit support available to the PTCs, payment mechanism for the transaction, and soundness of the transaction’s legal structure.

 

Crisil Ratings has now received the final legal/executed documents for this transaction. These executed documents are in line with terms of the transaction envisaged when provisional rating was assigned. Hence, Crisil Ratings has converted the provisional rating to a final rating.

 

Legal Documents

• Declaration of Trust
• Deed of assignment of receivables in the process of securitisation
• FLCF Agreement
• Power of attorney

 

Other Documents

• Information Memorandum
• Auditor’s Certificate
• Legal Opinion
• Originator’s Representations and Warranties Letter
• Trustee Awareness Letter

 

Payment Structure : The transaction has a ‘Par with Excess Interest Spread (EIS)’ structure. Series A1 PTC holders are promised timely interest on a monthly basis and principal on ultimate basis on the maturity date of the PTCs. Investor payouts for PTCs are supported by cash collateral, overcollateralisation and subordination of excess interest spread (EIS). MML will continue to service loan contracts in the pool as the servicing agent.

 

Crisil Ratings has estimated base case shortfalls in the pool at 7.0%-9.0% of cash flows. Additionally, potential stresses on account of economic, political and geographical concentration related factors have been applied to arrive at the adjusted base shortfalls for the pool.  These adjusted shortfalls are further stressed to arrive at the rating of PTCs.

 

Adequacy of credit enhancement: The total credit enhancement available in the transaction (internal – in the form of overcollateralization and EIS; and external – in the form of cash collateral) provide loss absorption against stressed shortfalls in the pool, commensurate with the rating assigned to the PTCs.

 

Total credit support available in the transaction structure is as below:

 

• Internal credit enhancement from scheduled cashflow subordination (assuming zero prepayments) amounting to Rs 21.53 crore (27.3% of pool principal) which includes Rs 10.65 crore of principal overcollateralization (13.50% of pool principal) and Rs 10.88 crore of excess interest spread (13.8% of pool principal) provide credit support to Series A1 PTCs.
• External cash collateral in the structure amounting to Rs 5.52 crore (7.0% of initial pool principal) in the form of Fixed Deposit.

Key Rating Drivers & Detailed Description

Strengths:

• Credit support available in the structure

-          External cash collateral in the structure amounting to Rs 5.52 crore (7.0% of pool principal) and internal credit enhancement from scheduled cashflow subordination (assuming zero prepayments) amounting to Rs 21.53 crore (27.3% of pool principal) which includes Rs 10.65 crore of principal overcollateralization (13.50% of pool principal) and Rs 10.88 crore of excess interest spread (13.8% of pool principal) provide credit support to Series A1 PTCs.

• Repayment track record contracts in the pool

-          The pool has a weighted average seasoning of 7.3 instalments for monthly repayment contracts and 34.0 instalments for weekly repayment transactions and pre-securitisation amortisation of ~25.9%.

-          All the 18,434 contracts in the underlying loan pool are current as of the cut-off date (December 06, 2024).

• Structure of the transaction

-          The legal structure envisaged for the transaction entails bankruptcy remoteness of the receivables and credit enhancement from the originator, and adherence to prevailing regulations on securitisations.

-          These are certified through an independent legal opinion from an external legal counsel.

 

Weakness:

• Vulnerability to socio-political risks

-          The microfinance industry remains susceptible to risks arising out of socio-political issues and policy / regulatory changes. Such events can disrupt loan repayments of underlying borrowers.

-          Pool collections have seen weakening in recent months primarily due to industry wide challenges such as high attrition, over-leveraging of borrowers and regional socio-political issues. However, the total support available to PTC holders through internal and external credit enhancement is commensurate with the rating of the instrument. Originators continue to adapt to evolving market dynamics, Crisil will continue to monitor the developments in microfinance industry.

Liquidity: Strong

Liquidity is strong given that the credit enhancement available in the structure is sufficient to cover losses exceeding 1.5 times the currently estimated base shortfalls

Rating Sensitivity Factors

Upward factors

• Credit enhancement available in the structure exceeding 3.0 times the estimated adjusted base shortfalls on the residual cash flows of the pool.

 

Downward factors

• Credit enhancement falling below 2.3 times the estimated adjusted base shortfalls
• A downgrade in the rating of the servicer/originator.
• Non-adherence to the key transaction terms envisaged at the time of the rating

About the company- Originator/Servicer profile
MML, a part of MPG, provides microfinance loans to women. MPG started its microfinance operations in 2010 as a separate division of MFL, the flagship company of the group. In December 2011, the group acquired a Mumbai-based non-banking financial company (NBFC), Pancharatna Securities Ltd, and renamed it MML. In March 2015, MML received an NBFC-MFI licence from the RBI. As on June 30, 2024, MFL held 50.2% equity and MFL's promoters held 5.3% in MML. Along with the promoters, MML's board includes one member nominated by Creation Investments and Greater Pacific Capital and four independent directors.

MML had AUM of Rs 12,210 crore and networth of Rs 2,924 crore as on June 30, 2024. Operations of the microfinance division are spread across Kerala, Tamil Nadu, Puducherry, Karnataka, Maharashtra, Gujarat, Haryana, Rajasthan, Uttarakhand, Madhya Pradesh, Uttar Pradesh, Odisha, West Bengal, Punjab, Chhattisgarh, Jharkhand, Bihar, Himachal Pradesh and Telangana

 

Key Financial Indicators

Particulars	Unit	June – 2024	March - 2024	March - 2023	March - 2022
Total assets	Rs crore	11,661	11590	8529	5591
Total income	Rs crore	641	2286	1446	843
Profit after tax	Rs crore	113	449.6	163.8	47.4
90+ dpd	%	4.1	4.2	5.1	6.8
Gearing	Times	2.9	3.0	4.0	3.0
Adjusted gearing	Times	3.8	3.9	5.2	4.5
Return on managed assets	%	3.2	3.6	1.8	0.7

annualized

 

Quality and experience of servicer:

(MML; rated ‘Crisil A+/Stable’), will continue to service loans assigned to this trust. MCSL has originated several securitisation transactions. Servicing has been carried out, and reports have been shared across all these transactions in a timely manner.

 

Risks and concerns for investors and mitigating factors: Based on Crisil Ratings’ assessment, the total credit enhancement available in the transaction (internal – in the form of EIS; and external – in the form of cash collateral) together can mitigate against shortfalls in collection from the pool even after stressing them commensurate with the rating assigned to the PTCs. Crisil Ratings has adequately factored key risks  in the transaction including Credit & Market (as highlighted in rating assumptions section), Counterparty and Legal risks. Legal risks are assessed based on detailed analysis of transaction documentation. Risk factored from counterparties are mentioned in the table below:

 

Counterparty details

Capacity	Counterparty	Rating	Effect on transaction rating in case of non-performance
Originator	MML	‘Crisil A+/Stable’	No effect.
Servicer	MML	‘Crisil A+/Stable’	Significant effect, because of change in servicing quality and replacement cost of servicer. However, currently Crisil Ratings does not envisage the need for replacement. The trustee, on behalf of the investors, shall retain the right to nominate an alternate collection agent in case of a “Servicer Event of Default”, linked to insolvency of the servicer or breach of any transaction terms.
Collection and Payout Account Bank	The Hongkong and Shanghai Banking Corporation Ltd	Not rated by Crisil Ratings	Negligible effect. The trustee, on behalf of the investors, has the right to change the collection and payout account bank if needed.
Cash collateral bank	The Hongkong and Shanghai Banking Corporation Ltd	Not rated by Crisil Ratings	Negligible effect. The trustee, on behalf of the investors, has the right to change the bank with whom the cash collateral is maintained if needed.
Trustee	Catalyst Trusteeship Limited	Not rated by Crisil Ratings	Negligible effect. The trustee can be replaced by the investor if needed.

 

A summary of key terms of servicer contract

The key points on the role of the servicer covered as part of the transaction documents are as below:

 

• The Trustee acting for and on behalf of the investors shall appoint, the servicer for the purpose of collecting, receiving and managing payment of the Receivables into the Collection and Payment Account for the purpose of managing, collecting and receiving the receivables, holding the underlying security and carry out other roles and roles and responsibilities as specified under the transaction document.

 

• The servicer shall receive servicing fees which shall be paid by the trustee in accordance with the Waterfall Mechanism as per the transaction documents.

 

• The servicer shall collect the receivables from the underlying borrowers and deposit the collected amounts in the collection and payment account in a timely manner as per the terms of the transaction documents.

 

• The servicer shall submit to the trustee all the data and reports in the manner and as per the timelines as specified under the transaction documents.

 

• The occurrence of certain events as per the terms of the transaction documents shall be construed as a Servicer Event of Default.

 

Provision for appointment of back-up servicer: The Trustee (acting on the instructions of the investors) as per the terms of the Servicer Agreement and upon the occurrence of Servicer’s Event of default, shall retain the right to appoint an alternate servicer

 

Performance of outstanding rated transactions

Crisil Ratings has ratings outstanding on 13 other securitisation transactions originated by MML. The cumulative collection ratios in these pools have been volatile ranging from 80.0% to 97.0% and 90+ delinquencies (including overdues) have been below 6.6% for all transactions as of November 2024 payouts.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date#	Issue size (Rs.Crore)	Complexity level	Rating assigned	Cash collateral^ (Rs.Crore)
INE1H8X15015	Series A1 PTCs	31-Dec-24	8.50	14-Sept-26	68.24	Highly complex	Crisil AA+ (SO)	5.52

#Indicates door to door tenure. Actual tenure will depend on the level of prepayments in the pool, and exercise of the clean-up call option

^Additional credit support includes Rs 21.53 crore (assuming zero prepayments) in the form of scheduled cashflow subordination for Series A1 PTCs – including Rs 10.65 crore of principal overcollateralization.