Detailed Rationale

CRISIL Ratings has assigned its ?Provisional CRISIL AAA (SO)? rating to Series A pass-through certificates (PTCs) issued by ?SHRI Trust AK 2023?. The transaction is backed by receivables from new and used medium and heavy commercial vehicles (MHCV), intermediate, light, and small commercial vehicles (ILSCV), construction equipment and material handling equipment (CE & MHE), and machinery loans originated by Sundaram Finance Ltd (SFL; rated ?CRISIL AAA/Stable/CRISIL A1+?). The ratings are based on credit support available to PTCs, credit quality of the underlying pool receivables, SFL?s origination and servicing capabilities, and soundness of the transaction?s legal structure.

 

The transaction has a ?par with Excess Interest Spread (EIS)? structure. SFL will assign the pool to ?SHRI Trust AK 2023?, settled by IDBI Trusteeship Services Limited (ITSL), which will issue the PTCs to investors, where scheduled payouts to investors have been arrived at, assuming a staggered basis of transfer of collections by the servicer, i.e. of all receivables comprising the principal amount due in a particular month (say, month M), 80% of the said principal amount shall be credited to the collection and payout account on the ascertained date of month M+1, and 20% of the said principal amount shall be deposited in the collection and payout account on the ascertained date of month M+2.

 

The PTCs are supported by the cash collateral ? in the form of fixed deposit? and excess interest spread. The total credit support available in the transaction is as below:

• Internal credit support in the form of scheduled Excess Interest Spread (EIS), aggregating Rs 8.96 crore (2.79% of pool principal securitised)
• External cash collateral of Rs. 25.34 crore (7.90% of pool principal) which is in form of Fixed Deposit.

 

Series A PTCs are entitled to receive timely interest on a monthly basis whereas promised principal payment to investor is on an ultimate basis by the last payout date.

 

Additional disclosures for the provisional rating

The provisional rating is contingent upon execution of the following documents: This is a ?provisional? rating and will be converted into a ?final? rating on receipt of all the relevant transaction-related documents required by CRISIL, including, but not limited to, the following.

 

• Trust deed
• Deed of assignment
• Power of attorney
• Information memorandum
• Legal opinion
• Trustee letter
• Auditor?s certificate
• Representations and warranties letter

 

Additional documents, if any, executed for the transaction should also be provided. A rating rationale/report, indicating the conversion of the ?provisional? rating into ?final? following the receipt of all the required final legal documents, will be published on the CRISIL website. Please click on the following link for detailed information on CRISIL?s policy for provisional rating: Revision in CRISIL?s policy for assigning ?provisional? ratings.

 

The final rating assigned post conversion shall be consistent with the available documents. In case of non-receipt of the duly executed transaction documents within the above-mentioned timelines, the rating committee of CRISIL Ratings may grant an extension of up to another 90 days.

 

Rating that would have been assigned in the absence of the pending documentation

In the absence of pending documentation considered while assigning provisional rating as mentioned above, CRISIL Ratings would not have assigned any rating.

 

Risks associated with the provisional rating:

A prefix of 'Provisional' to the rating symbol indicates that the rating is contingent upon occurrence of certain steps or execution of certain documents by the issuer, as applicable. In case the documents received and/or completion of steps deviates significantly from the expectations, CRISIL Ratings may take an appropriate action including placing the rating on watch or a rating/outlook change, depending on status of progress on a case to case basis. In the absence of the pending steps / documentation, the rating on the instrument would not have been assigned ab initio.

Key Rating Drivers & Detailed Description

Strengths:

• Structural support: Series A PTC payouts are supported by cash collateral (CC) of INR 25.34 crore (7.90% of the pool principal securitised) and subordination of scheduled EIS (assuming zero prepayments and post servicer fee payment) of INR 8.96 crore (2.79% of the pool principal securitised).
• Track record of pool contracts: The pool contracts had a high seasoning as indicated by weighted average seasoning of 12.4  months and an amortisation of 30.6% (as of pool cut-off date of August 31, 2022). Further, pool contracts had no overdues as of the pool cut-off date, with 97.7% of the pool principal arising from contracts that had not exhibited any instance of delinquency in the past.

 

Weakness:

• Borrower concentration: The pool is moderately concentrated with top 10 borrowers accounting for 6.5% of pool principal securitised.
• Macroeconomic headwinds: Borrowers in the underlying pool could come under pressure due to a challenging macroeconomic environment. Headwinds such as increased fuel costs, an increasing interest rate scenario, and moderation in demand on account of inflation and geo-political uncertainties. These factors may hamper pool collection ratios.

Liquidity: Strong

Liquidity position is strong given that the credit enhancement (internal and external combined) in the structure is above 1.5 times the estimated base shortfalls on the residual pool cash flows.

 

These aspects have been factored by CRISIL in its rating analysis.

Rating Sensitivity factors

Upward factors:

• None, given the credit ratings on the Series A PTCs are currently at the highest level

 

Downward factors:

• Credit enhancement (internal and external combined) falling below 2 times the estimated base shortfalls on the residual pool cash flows
• Deterioration in the credit quality of the servicer/originator
• Non-adherence to the key transaction terms envisaged at the time of the rating

 

About the pool

The securitisation transaction is back by a pool of receivables from new and used MHCV, ICV, LCV, SCV, CE (including material handling equipment), and machinery loans. The pool has a healthy seasoning profile, as evidenced by its weighted average net seasoning of 12.4 months and amortisation of 30.6%. Geographic concentration is moderate, with the top three states accounting for 55.9% of the pool principal. Average ticket size is Rs 20.7 lakh on account of higher proportion of new MHCVs and CE, with a weighted average interest rate of 9.6% and loan to value ratio of 82.4%. Pool contracts had no overdues as of the pool cut-off date, with 97.7% of the pool principal arising from contracts that had not exhibited any instance of delinquency in the past. CRISIL Ratings has adequately factored all these aspects into its rating analysis.

 

Rating Assumptions To assess the base case shortfalls for the transaction, CRISIL has analysed static pool information of various asset classes provided by SFL for originations during the period FY2017 to FY2022 (with performance data till August 2022). CRISIL has also analysed performance of past rated securitisation transaction, and the performance of SFL?s portfolio.   CRISIL has also factored in pool-specific characteristics and estimated the base case peak shortfalls in the pool, in the range of 2.5%-4.5% of pool cash flows.   CRISIL has assumed a stressed monthly prepayment rate of 0.2%-0.5% in its analysis. CRISIL does not envisage any risk arising from commingling of cash flows, since CRISIL?s short-term rating on the servicer is ?CRISIL A1+? CRISIL has adequately factored in the risks arising on account of counterparties (refer to counterparty details below) CRISIL has run sensitivities based on various shortfall curves (front-ended, back-ended, and normal) and has adequately factored these into its analysis.

 

Counterparty details

Capacity	Counterparty Name	Counterparty Rating/ Track record	Effect on credit ratings in case of non-performance
Originator and seller	SFL	Rated ?CRISIL AAA/Stable/CRISIL A1+?	No effect
Servicer	SFL	Rated ?CRISIL AAA/Stable/CRISIL A1+?	Significant effect because of change in servicing quality and replacement cost of servicer (not factored in by CRISIL given CRISIL?s rating on the servicer). However, CRISIL does not envisage the requirement for replacement.
Collection and Payout Account Bank	State Bank of India	Rated ?CRISIL AAA/CRISIL AA+/Stable?	Negligible effect. Account bank can be changed without impacting the rating.
Cash collateral in the form of fixed deposit	Bank of Baroda	Rated ?CRISIL AAA/CRISIL AA+/Stable?	Negligible effect. Bank with whom the fixed deposit is maintained can be changed without impacting the rating.
Trustee	ITSL	Adequate track record	Negligible effect. Can be replaced at minimal cost.

 

About the Originator

Sundaram Finance, the flagship company of the group, commenced operations in 1954, as a wholly owned subsidiary of Madras Motor and General Insurance Company Ltd, a member of the TVS group of companies. Listed in 1972, when TVS sold its ownership to the public, Sundaram Finance is registered with the Reserve Bank of India (RBI) as a deposit-taking NBFC, and is classified by the RBI as Investment and Credit company. The company had a nationwide network of 612 branches and 4228 employees as on December 31, 2021. SFL?s AUM primarily consisted of Commercial Vehicles (45.7%), Car loans (25.8%), Construction Equipment (11.1%), Tractors (8.1%) and other loans (9.3%) as on December 31, 2021. Further, SFL?s overall disbursements picked up by ~13% to Rs.9,524 crore in 9MFY22 from Rs. 8,437 crore in 9MFY21

 

The group also has presence in housing finance, asset management, and non-life insurance segments. The housing finance business was conducted through a joint venture (JV) with BNP Paribas (49.9% equity stake; through BNP Paribas Personal Finance, a wholly-owned subsidiary). Post-acquisition of 49.9% stake from BNP Paribas Personal Finance in Sundaram Home, Sundaram Finance holds 100% stake in the company and has become a wholly-owned subsidiary. The asset management business is /conducted through Sundaram Asset Management Company Ltd, a wholly-owned subsidiary of Sundaram Finance. Insurance business is carried through Royal Sundaram and SFL holds 50% in Royal Sundaram General Insurance Company Ltd (RSGI) post Ageas International NV bought 40% stake in RSGI in fiscal 2019.

 

For fiscal 2021, Sundaram Finance reported total income and net profit of Rs 4014 crore and Rs 809 crore, respectively, against Rs 3,927 crore and Rs.  724 crore, respectively, for the previous fiscal.

 

Further, for the nine months ended December 31, 2021, it reported total income and net profit of Rs 2942 crore and Rs 605 crore, respectively, against Rs 2996 crore and Rs 600 crore, respectively, for the corresponding period previous fiscal. The group reported total income and net profit of Rs. 5317 crore and Rs. 1223 crore, respectively, for fiscal 2021, against Rs. 4723 crore and Rs.845 crore, respectively, for the previous fiscal.

 

Past rated pools

CRISIL has ratings outstanding on five transactions originated by SFL. CRISIL is receiving monthly performance reports pertaining to the transaction.

Any other information: Not applicable

Annexure - Details of Instrument(s)

Type of Instrument	Rated Amount (Rs Cr)	Date of Allotment	Maturity Date#	Coupon Rate (%) (p.a.p.m)	Outstanding Ratings/credit opinions	Complexity Level	Cash collateral (Rs Cr)^
Series A PTCs	320.71	13-Oct-22	25-Mar-27	6.43%	Provisional CRISIL AAA (SO)$	Highly complex	25.34

#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

^Scheduled EIS amounting to Rs 8.96 crore (assuming zero prepayments) also provides credit support to PTCs.

$Series A PTC-holders are entitled to receive promised timely interest on a monthly basis whereas principal repayment to is promised on an ultimate basis by the last payout date.