Sansar Aug 2024 VIII Trust

(Originator: Shriram Finance Limited)
‘CRISIL AAA (SO)’ for Series A1 PTCs and ‘CRISIL BBB+ (SO)’ for Series A2 PTCs converted from provisional ratings to final ratings

 

Rating Action

Tranche Name	Amount Rated (Rs.Crore)	Outstanding Amount (Rs.Crore)	Balance Tenure	Credit Collateral (Rs.Crore)	Ratings	Rating Action
Series A1 PTCs	906.95	852.12	58	21.16	CRISIL AAA (SO)	Converted from Provisional Rating to Final Rating
Series A2 PTCs	100.77	100.77	58	21.16	CRISIL BBB+ (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 its provisional ratings assigned to Series A1 Pass-Through Certificates (PTCs) and Series A2 PTCs issued by ‘Sansar Aug 2024 VIII Trust’ to final ratings of 'CRISIL AAA (SO)' and ‘CRISIL BBB+ (SO)’ under a securitisation transaction originated by Shriram Finance Limited (SFL; rated ‘CRISIL AA+/CRISIL PPMLD AA+/Stable/CRISIL A1+’).

 

This securitisation transaction is backed by receivables from a pool of vehicle loans originated by SFL. The ratings are based on the expected credit quality of the pool backing the transaction, the origination and servicing capabilities of SFL, credit enhancement available to the PTCs, the transaction’s payment mechanism, 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 ratings to final ratings.

 

Legal Documents

• Amended and restated Declaration of Trust
• Deed of Assignment of receivables in the process of securitisation
• Power of Attorney

 

Other Documents

• Information Memorandum
• Legal Opinion
• Auditors Certificate
• Representation and Warranties Letter
• Trustee Awareness Letter

 

The transaction has a ‘Par with EIS’ structure. SFL has assigned the loan pool to ‘Sansar Aug 2024 VIII Trust’, a Trust settled by the transaction’s Trustee, i.e. Catalyst Trusteeship Limited (‘CTL’) in exchange for a purchase consideration amounting to 100.0% of the initial pool principal as on the cut-off date. The Trust has issued Series A1 PTCs and Series A2 PTCs to investors for amounts equal to 90.0% and 10.0% of the initial pool principal as on the cut-off date, respectively. The Trustee has appointed SFL as the Servicer, and collections from the pool shall be transferred to the Collection and Payout Account (CPA) on a monthly basis to make investor payouts as per the transaction’s waterfall mechanism.

 

Series A1 PTC holders are promised timely interest payments on a monthly basis. Principal repayment, while expected on a monthly basis, is promised only on an ultimate basis by the Series A1 PTC’s final maturity date. Post redemption of Series A1 PTCs, principal repayment to Series A2 PTC investors is expected on a monthly basis but promised only on an ultimate basis by the Series A2 PTC’s legal final maturity date. Series A2 investors are expected to receive residual EIS amounts on a monthly basis, however, the rating on Series A2 PTCs only addresses the likelihood of principal repayment by the legal final maturity date, and not the payment of residual EIS amounts.

 

The investor payouts for Series A1 PTCs are supported by cash collateral, subordination of Series A2 PTC principal, and subordination of excess interest spread (EIS). On a monthly basis, the cash collateral can be used to make the promised interest payments to Series A1 PTCs in case of a shortfall in collections from the pool. On the Series A1 PTC’s final maturity date, the cash collateral can also be used to make the promised principal repayment in case of a shortfall in collections from the pool. Post the redemption of Series A1 PTCs, On the Series A2 PTC’s final maturity date, the cash collateral can also be used to make the promised principal repayment in case of a shortfall in collections from the pool.  Prior to the redemption of Series A1 PTCs, prepayment collections will be utilised for accelerated redemption of the Series A1 PTCs, and post the redemption of Series A1 PTCs, prepayment collections will be utilised for accelerated redemption of the Series A2 PTCs.

 

Credit enhancement available in the transaction structure to support promised PTC payouts is as below:

 

• External credit enhancement for Series A1 and Series A2 PTCs from a cash collateral amounting to Rs 21.16 crore (2.1% of the initial pool principal) which is expected to be maintained as fixed deposits with a bank and lien-marked in favour of the Trustee.
• For Series A1 PTCs, internal credit enhancement from subordination of Series A2 PTCs principal amounting to Rs 100.77 crore (10.0% of the initial pool principal), and subordination of scheduled EIS amounting to Rs 252.85 crore (25.1% of the initial pool principal).
• For the ultimate principal repayment of Series A2 PTCs, internal credit enhancement from subordination of scheduled EIS amounting to Rs 152.1 crore (15.1% of the initial pool principal)

Key Rating Drivers & Detailed Description

Strengths:

•                   Credit enhancement available in the transaction structure.

−                     Cash collateral of Rs 21.16 crore (2.1% of pool principal) for Series A1 PTCs investor payouts and Series A2 PTCs principal repayment.

−                     Scheduled cashflow subordination aggregating to Rs 252.85 crore (25.1% of pool principal, assuming zero prepayments) for Series A1 PTCs – including subordination of Series A2 PTC principal of Rs 100.77 crore (10.0% of pool principal).

−                     Subordination of excess interest spread of Rs 152.08 crore (15.1% of pool principal, assuming zero prepayments) for the principal repayment of Series A2 PTCs.

•                   Borrower diversification and repayment track record of pool loans

−                     The pool has 27,997 contracts and is therefore, well diversified; top 10 loans contribute only 1.2% of the pool principal.

−                     The pool has a weighted average seasoning of 11.3 months considering the pool cut-off date of Aug-20th, 2024. All loans were current on repayment as of the cut-off date.

•                   Legal soundness of the transaction structure

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

−                     These shall be certified through an independent legal opinion from an external legal counsel.

 

Weakness:

•                   Potential effect of macro-economic 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 the pool’s collection performance.

 

CRISIL Ratings has adequately factored these aspects in its rating analysis.

Liquidity: Strong for Series A1 PTCs, Adequate for Series A2 PTCs

For Series A1 PTCs: The cash collateral available in the transaction structure is Rs 21.16 crore (2.1% of the initial pool principal) which is in the form of a fixed deposit. Liquidity is strong given that the credit enhancement (internal and external combined) in the structure is sufficient to cover losses exceeding 1.5 times the currently estimated base shortfalls. The cash collateral is sufficient to cover promised interest payouts for the first 4 months even if the collection efficiency of the pool drops to 0%.

 

For Series A2 PTCs: Liquidity is adequate given that the credit enhancement (internal and external combined) in the structure is sufficient to cover losses exceeding 1.1 times the currently estimated base shortfalls.

Rating Sensitivity factors

Upward

• For PTCs: none

 

Downward

• Credit enhancement (based on both internal and external credit enhancements) failing to cover losses of 2.5 times the estimated base case shortfalls due to weaker than expected pool collections.
• A sharp downgrade in the rating 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 backed by a pool of receivables from HCV, PV, SCV, CE, LCV loans (36.3%, 28.8%, 14.6%,12.9%, 7.3% of initial pool principal respectively) originated by SFL. As of the pool cut-off date (20-Aug-2024), the pool loans had a weighted average seasoning of 11.3 months, a weighted average interest rate of 16.3%, a weighted average LTV ratio of 77.4%, a weighted average original tenure of 48.6 months, and an average original loan amount of Rs 4.5 lakh. The top 3 states (Andhra Pradesh, Tamil Nadu, and Karnataka) contributed 39.7% of the initial pool principal. All the underlying pool loans were current on repayment as on the cut-off date.

The underlying pool loans were current on repayment as on the cut-off date.

Rating assumptions To assess the base case shortfalls for the transaction, CRISIL Ratings has analysed the 90+ delinquency performance of static pools of SFL’s new and used vehicle loan originations over the period FY11 to FY24 (with performance until March 2024). CRISIL Ratings has also analysed the portfolio cuts based on original tenure, loan amount, state, interest rate etc. and compared the pool with the portfolio on these parameters. CRISIL Ratings has also analysed the dynamic portfolio delinquencies of SFL’s portfolio across various portfolio segments. As of March 2024, the 90+ delinquency for SFL’s CV, CE, PV and Farm equipment portfolios was 3.2%, 3.6%, 2.8% and 3.7% respectively, CRISIL has also considered the performance of rated securitisation transactions of SFL. CRISIL Ratings has estimated base case shortfalls in the pool at 5.0%-7.0% of cash flows. CRISIL Ratings has also assumed a monthly prepayment of 0.5%-1.5% in its credit enhancement calculation. CRISIL Ratings has adequately factored in the transaction structure and risks arising out of counterparties . CRISIL Ratings has run sensitivities based on various shortfall timing curves (front-ended, back-ended and normal) and has adequately factored the same in its analysis. CRISIL Ratings does not envisage any risk arising on account of commingling of cash flows since its short-term rating on the servicer is ‘CRISIL A1+’. CRISIL Ratings has assumed a monthly prepayment rate of 0.5-1.5% of the initial pool principal. CRISIL Ratings does not envisage any risk arising on account of commingling of cash flows given its short-term rating on the servicer. CRISIL Ratings has factored in the risks arising on account of transaction counterparties. CRISIL Ratings has factored in sensitivities based on various shortfall timing curves (front-ended, back-ended and normal).

 

Counterparty details

Capacity	Counterparty	Rating	Effect on transaction rating in case of non-performance
Originator	SFL	CRISIL AA+/CRISIL PPMLD AA+/Stable/CRISIL A1+	No effect.
Servicer	SFL	CRISIL AA+/CRISIL PPMLD AA+/Stable/CRISIL A1+	Significant effect, because of change in servicing quality and replacement cost of the Servicer. However, CRISIL Ratings does not currently envisage the need for replacement. The Trustee, on behalf of the investors, shall retain the right to appoint a replacement Servicer in the occurrence of a ‘Servicer Event of Default’ as per the terms of the transaction.
Collection and Payout Account (CPA) Bank	Indusind Bank Limited	CRISIL AA+ /Stable/CRISIL A1+	Negligible effect. As per the terms of the transaction, the Trustee, on behalf of the investors, has the right to change the CPA Bank.
Cash Collateral Bank	Indusind Bank Limited	CRISIL AA+ /Stable/CRISIL A1+	Negligible effect. As per the terms of the transaction, the Trustee, on behalf of the investors, has the right to change the Bank with which the Cash Collateral fixed deposits are maintained.
Trustee	Catalyst Trusteeship Limited	Not rated by CRISIL Ratings	Negligible effect. As per the terms of the transaction, the Trustee can be replaced by the investors holding majority interest.

 

About the Originator
Following the consummation of the merger of SCUF and demerged undertaking of Shriram Capital Limited with SFL (erstwhile STFCL), the company has been renamed to Shriram Finance Ltd (SFL). Shriram Housing Finance Ltd (SHFL) continues to operate as a subsidiary of SFL which holds around 84.2% stake in the former. Pursuant to the consummation of the transaction, Shriram Capital and SCUF cease to exist.

SFL, incorporated in 1979, was registered with RBI as a deposit-taking, asset-financing non-banking financial company and predominantly provides financing for vehicles such as CVs (both pre-owned and new), tractors, and passenger vehicles. Erstwhile SCUF (now merged into SFL) was incorporated in 1986 and operated in the retail financing segment with a focus on small enterprise loans, two-wheeler financing, gold loans, housing loans and others (auto and personal loans).

 

Key Financial Indicators: SFL consolidated

As on/for year ending	Unit	Mar-24	Mar-23	Mar-22^
Assets under Management (AUM)	Rs. Cr.	2,38,624	1,93,730	1,27,041
Total income (net of interest expenses)	Rs. Cr.	20,891	17,577	9,540
Profit after tax	Rs. Cr.	7,399	6,020	2,721
Gross NPA (Gross Stage-3)*	%	5.2	6.0	7.0
On-book gearing	Times	3.9	3.8	4.4
Return on managed assets	%	3.1	3.0	2.0

*Gross Stage-3 estimated on combined basis for SFL and SHFL

^Pre-merger

 

Key Financial Indicators: SFL Standalone

As on/for year ending	Unit	Mar-24	Mar-23	Mar-22^
Assets under Management (AUM)	Rs crore	221,668	185,683	127,041
Total income (net of interest expenses)	Rs crore	20,191	17,257	9,540
Profit after tax	Rs crore	7,190	5,979	2,708
On-book gearing	Times	3.8	3.6	4.4
Return on managed assets	%	3.2	3.4	2.0

^Pre-merger

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of allotment	Coupon rate	Maturity date#	Size of the issue (Rs.Crore)	Complexity level	Rating assigned@	Cash collateral (Rs.Crore)
INE15WJ15012	Series A1 PTCs	13-Sep-24	8.35% p.a.p.m.	17-Sep-29	906.95	Highly complex	CRISIL AAA (SO)	21.16
INE15WJ15020	Series A2 PTCs	13-Sep-24	Variable (residual EIS)	17-Sep-29	100.77	Highly complex	CRISIL BBB+ (SO)	21.16

 #Indicates legal final maturity date for the instrument. Actual maturity date will depend on the level of collection shortfalls in the pool, the level of prepayments in the pool, and exercise of the clean-up call option.

@The rating on Series A2 PTCs only addresses the likelihood of principal repayment by the legal final maturity date, and not the payment of residual EIS amounts.