Sansar June 2024 Trust

(Originator: Shriram Finance Limited)

'Provisional CRISIL AAA (SO)' assigned to PTCs

 

Rating Action

Trust Name	Details	Pool Principal (Rs.Crore)	Rated Amount (Rs.Crore)	Original Tenure*	Cash Collateral (Rs.Crore)	Ratings/ Credit Opinions@	Rating Action
Sansar June 2024 Trust	PTCs	1506.42	1506.42	72	192.07	Provisional CRISIL AAA (SO)	Provisional Rating Assigned

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

*Including replenishment period (6 months) and amortization period (66 months). Actual maturity will depend on the level of collection shortfalls in the pool, the level of prepayments in the pool, occurrence of triggers during replenishment and amortisation period, and exercise of the clean-up call option.

@A prefix of 'Provisional' indicates that the rating centrally factors in the strength of specific structures and is contingent upon occurrence of certain steps or execution of certain documents by the issuer, as applicable, without which the rating would either have been different or not assigned ab initio. This is in compliance with a May 6, 2015 directive ‘Standardizing the term, rating symbol, and manner of disclosure with regards to conditional/ provisional/ in-principle ratings assigned by credit rating agencies' by Securities and Exchange Board of India (SEBI) and April 27, 2021 circular ‘Standardizing and Strengthening Policies on Provisional Rating by Credit Rating Agencies (CRAs) for Debt Instruments’ by SEBI

Detailed Rationale

CRISIL Ratings has assigned its ‘Provisional CRISIL AAA (SO)’ rating to Pass Through Certificates (PTCs) to be issued by ‘Sansar June 2024 Trust’ under a securitisation transaction backed by receivables from loans 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 commercial vehicle, passenger vehicle and construction equipment 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.

 

The PTCs are issued under a replenishment structure with door-to-door tenure of 72 months. Of this, the first 6 months serve as the replenishment period followed by the amortisation period of 66 months. During the replenishment period, monthly interest payments are promised to PTC investors. Residual cash flows from the pool during this period will be used to replenish the pool with fresh loan assets that meet pre-defined eligibility criteria. There would be no amounts flowing back to the originator during the replenishment period.

 

During the amortisation period, PTC investors are promised interest payments and principal repayments on a monthly basis. The residual cash flows will be used to make accelerated principal repayments to PTC investors until the cash collateral amount is equal to 18.5% of the outstanding PTC principal. The cash collateral can be utilised for making the promised interest payments during the replenishment period, and for making both promised interest payments and principal repayments during the amortisation period.

 

The transaction structure provides for certain trigger events, defined at the time of issuance of PTCs. Should any of the pre-defined trigger events occur during the replenishment period, the replenishment would stop and the amortisation period will come into effect. In case of any trigger event occurring during the amortisation period, surplus cash flows from the pool would be used for accelerated redemption of PTC principal.

 

Investor payouts for PTCs are supported by cash collateral and subordination of excess interest spread (EIS). SFL will continue to service loans in the pool as the servicing agent.

Key Rating Drivers & Detailed Description

Strengths:

•                   Credit enhancement available in the transaction structure

−                     Cash collateral of Rs 192.07 crore (12.75% of initial pool principal)

−                     Subordination of excess interest spread (EIS). For the initial pool, assuming PTC amortisation from the first month, the scheduled EIS amounts to Rs 200.44 crore (13.3% of the initial pool principal).

−                     Pool can also benefit from potential overcollateralization build-up prior to amortisation considering utilisation of EIS to purchase new loan assets during the replenishment period.

•                   Borrower diversification and credit profile

−                     The initial pool had 39,276 loans and is therefore, fairly diversified; top 10 borrowers contributed to only 0.1% of the initial pool principal. 

−                     All contracts in the initial pool were current as of pool cut-off date i.e., 31-May-2024.

•                   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:

•                   Pool composition

−                     Pool comprises contracts having high ticket size and high interest rates that have exhibited higher delinquencies in the used-asset segment at the portfolio level.

−                     Potential changes in the pool during replenishment period; however, these changes are controlled within certain boundary conditions established through well-defined eligibility criteria for new loans added to the pool and replenishment termination events to prevent excessive build-up of risks in the pool.

•                   Effect of potential macro-economic headwinds

−                     The pool’s collection performance could be hampered in a challenging macroeconomic environment and would remain susceptible to factors like increasing fuel costs, increasing interest rates, and demand moderation owing to inflation and geo-political uncertainties.

 

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

Liquidity: Strong

The cash collateral available in the transaction structure is Rs 192.07 crore (12.75% 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.

Rating Sensitivity Factors

Upward factors

• None
   

Downward factors

• 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 replenishing pool of receivables from passenger vehicle, commercial vehicle and construction equipment loans (54.2%, 38.7% and 7.0%, respectively, of the initial pool principal) originated by SFL. As of the pool cut-off date (31-May-2024), the initial pool loans had a weighted average seasoning of 8.2 months, a weighted average interest rate of 17.9%, a weighted average LTV ratio of 71.8%, a weighted average original tenure of 42.1 months, and an average original loan amount of Rs 4.6 lakh. The top 3 states (Karnataka, Tamil Nadu and Andhra Pradesh) contributed 40.2% of the initial pool principal.

 

Eligibility criteria for the pool loans to be added in monthly replenishments are listed below:

Parameter	Criteria
Nature of loans	Vehicles (CVs) registered and located in India Replenishment from CV loans only
Asset class-wise maximum proportion	Passenger vehicle (PV, 55%), heavy commercial vehicle (HCV, 40%), light commercial vehicle (LCV, 25%) and construction equipment (CE, 7.5%)
Delinquency	No principal or interest is overdue by more than 1 month and no other event of default for any loan contract
Maturity	Pool maturity shall not be more than 72 months from the date of assignment of loans (replenishment period of 6 months + amortisation period of 66 months).
	Other eligibility criteria	Current CV pool characteristics
Seasoning	At least 7.5 months	8.2 months
Tenure (months)	Max 60 months	42.1 months
Wt. Avg. Loan to value (LTV)	Max 75%	71.8%
Avg ticket size on cut-off date	Rs 4.0 lakh	Rs 3.8 lakh average POS, Rs 4.6 lakh average original disbursement
Wt. Avg. IRR	Max 20%	17.9%
Maximum original tenure	10 years	97 months
Pool loan IRR	In the range of 12% - 30%
Geographical concentration	<15% of the loans from a single state (% of POS) <20% of the loans from a single state (% of no. of individual loans outstanding)

 

Replenishment termination events:

Parameter	Criteria
Issuer rating	Rating downgrade of the Issuer to below AA+ by any domestic CRA, or below BB by any international rating agency
Asset quality	Gross and Net Stage 3 assets of the Originator exceed 10% and 5% respectively
Pool performance	30 days overdue exceeds 4% at the end of the first 3 months or 8.5% anytime after that, or 60 days overdue exceeds 2% at the end of the first 3 months or 4% anytime after that
Repayments	Cumulative repayments on the underlying loans exceeds 40% of the original pool
PTC Event of Default	Any scheduled principal or interest payout on the PTCs is not made on scheduled payout date
Backup servicer trigger event	insolvency of the Servicer voluntary winding up of the Servicer or an order for winding up of the Servicer is made by any competent Court; the Servicer is prevented by any competent regulatory agency from carrying on its business; breach of obligations under the collection and servicing agency agreement; breach of any representations or warranties made by the Servicer; reorganisation, liquidation or dissolution of the Servicer; appointment of a resolution professional, receiver or liquidator; if the moneys held in trust by the Servicer are jeopardised for any reason whatsoever; attachment, restraint on the assets of the Servicer or certificate proceedings against the Servicer; and any event which would in the opinion of the Trustee (acting on the instructions of the investor in the PTCs) preclude the Servicer from performance of its obligations under the collection and servicing agency agreement obligations of the Servicer being or becoming void, voidable, unenforceable or ineffective. Downgrade in the rating of the Servicer to below AA by any domestic Rating Agency or below B+ by S&P or below BB- by Fitch

 

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 commercial vehicle loan originations over the period FY11 to FY23 (with performance until December 2023). 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 December 2023, the 90+ delinquency for SFL’s used CV and new CV portfolios was 3.1% and 3.6% respectively. As of March 2023, the 90+ delinquency for HCV, LCV and PV loan segments of the vehicle loan portfolio was 3.8%, 2.0% and 2.5% respectively. CRISIL has also considered the performance of rated securitisation transactions of SFL.   CRISIL Ratings has factored pool-specific characteristics, and potential changes to the pool during the replenishment period based on the eligibility criteria and replenishment termination events and estimated the base case peak shortfalls in the pool in the range of 6.0-8.0% of pool 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 (please refer to Annexure 4 for more details). 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+’.

 

Counterparty Details

Capacity	Counterparty	Rating	Effect on PTC ratings in case of non- performance
Originator and seller	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	Barclays Bank PLC	-	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	Barclays Bank PLC	-	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	-	Negligible effect. As per the terms of the transaction, the Trustee can be replaced by the investors holding majority interest.

 

Additional disclosures for Provisional ratings:

The provisional rating is contingent upon execution and receipt of the following documents:

 

Executed documents:

• Trust Deed
• Agreement to Assign
• Deed of Assignment(s)
• Cash Collateral Agreement
• Servicer Agreement
• Power of Attorney

 

Other documents:

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

 

Additional documents, if any, executed for the transaction should also be provided along with the above documents. The provisional rating shall be converted into a final rating after receipt of transaction documents duly executed within 90 days from the date of issuance of the instrument. 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 in line with its policy on provisional ratings.

 

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

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

 

Risks associated with provisional nature of credit rating:

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

About the Originator

Following the consummation of the merger of Shriram City Union Finance Limited (SCUF) and demerged undertaking of Shriram Capital Limited with Shriram Transport Finance Company Limited (STFCL), the company has been renamed to Shriram Finance Limited (SFL). Shriram Housing Finance Limited (SHFL) continues to operate as a subsidiary of SFL which holds around 84.2% stake in the SHFL. Pursuant to the consummation of the transaction, Shriram Capital Limited 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 loans, gold loans, housing loans and others (auto and personal loans).

 

Key Financial Indicators

As on/for year ending	Unit	Dec-23	Mar-23	Mar-22^
Assets under Management (AUM)	Rs crore	2,26,259	1,93,730	1,27,041
Total income (net of interest expenses)	Rs crore	15,170	17,577	9,540
Profit after tax	Rs crore	5,378	6,020	2,721
Gross NPA (Gross Stage-3)*	%	5.6	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

 

Performance of previously rated transactions

CRISIL Ratings has ratings outstanding on instruments issued under 20+ securitisation transactions backed by SFL-originated loans. CRISIL Ratings is receiving monthly performance reports pertaining to these transactions. The cumulative collection efficiency in the underlying pools for these transactions range from ~93% to ~100% as of May-2024 payouts, with 90+ delinquency remaining at or below 3.5% of the initial pool principal.

Any other information: Not Applicable

Annexure - Details of Instrument(s)

ISIN^	Name of instrument	Date of allotment#	Coupon rate	Maturity date@	Size of the issue (Rs.Crore)	Complexity level	Rating assigned	Cash collateral (Rs.Crore)
NA	PTCs	03-Jul-2024	8.85% p.a.p.m.	25-Jun-2030	1,506.42	Highly complex	Provisional CRISIL AAA (SO)	192.07

^ISIN details for instruments were not received as of date

#Indicative date of allotment, instruments have not been issued as of date

@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 instrument tenure includes a replenishment period of up to 6 months and amortization period of 66 months.