Rating Rationale

Detailed Rationale

CRISIL Ratings has assigned its ‘Provisional CRISIL AAA (SO)’ ratings to Series A pass-through certificates (PTCs) issued by ‘Sansar Trust AUG 2022 IV’ under a securitisation transaction originated by Shriram Transport Finance Company Limited (STFCL; rated ‘CRISIL AA+/CRISIL PPMLD AA+r/Stable/CRISIL A1+’). The second loss facility under this transaction has been assigned a credit opinion of ‘Provisional CRISIL BBB+ (SO) Equivalent’.

This securitisation transaction is backed by receivables from loans originated by STFCL; including used and new commercial vehicles (CV), passenger vehicles (PV), tractors and construction equipment (CE). The rating / credit opinion is based on the credit support available to the PTCs, credit quality of underlying receivables, STFCL’s origination and servicing capabilities, the payment mechanism, and soundness of the transaction’s legal structure.

The transaction has a ‘par with excess interest spread (EIS)’ structure. STFCL will assign the pool to ‘Sansar Trust AUG 2022 IV’, settled by a trust which will issue the PTCs to investors. PTC payouts are supported by credit collateral in the form of fixed deposits; and EIS.

The total credit support available in the transaction is as below:

Internal credit support in the form of scheduled EIS assuming zero prepayments aggregating to Rs 50.82 crore (13.2% of pool principal) for Series A PTCs.
External credit enhancement of Rs 38.13 crore (9.9% of pool principal) of which first loss facility of Rs 19.28 crore (5.0% of pool principal) and second loss facility of Rs 18.85 crore (4.9% of pool principal). Both shall be in the form of fixed deposits.

Interest and principal payouts to Series A PTC holders are scheduled and promised on a monthly basis

Additional disclosures for Provisional ratings:

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

Trust deed
Deed of assignment
Power of attorney
Information memorandum
Legal opinion
Trustee’s awareness letter
Auditor’s certificate
Originator’s representations and warranties letter

Additional documents executed for the transaction, if any, should also be provided. 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.

Rating that would have been assigned in absence of the pending steps/ 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 provisional nature of credit 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 and detailed description

Supporting Factors

Credit support available in the structure for PTCs
- Credit collateral of Rs 38.13 crore (9.9% of pool principal or 7.8% of pool cash flows) provides credit support to Series A PTC investor payouts. The PTCs also benefit from scheduled cashflow subordination aggregating Rs 50.82 crore for Series A PTCs.
Borrower diversification
- The pool has 12,255 contracts and is therefore, fairly diversified; top 10 borrowers contribute to only 0.9% of the outstanding pool principal.
All contracts are current as of pool cut-off date i.e, September 20, 2022.

Constraining Factors

Contracts in the pool have a high weighted average IRR of 17.0%.
- Contracts having high IRRs have exhibited higher delinquencies at the portfolio level
Modest amortization
- The contracts in the pool have a weighted average seasoning of 8.3 months, resulting in 16.3% principal amortization prior to securitisation.
Potential effect of macro-economic headwinds
- Borrower cash flows could be adversely impacted by several exigencies such as increase in fuel costs, moderation in demand on account of inflation and increasing interest rate scenario amid geo-political uncertainties. These may hamper pool collection ratios.

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

Rating Sensitivity factors

Upward

For Series A PTCs: None.
For second loss facility: Credit enhancement (both internal and external credit enhancement) available in the structure exceeding 1.75 times the estimated base case shortfalls on the residual cash flows of the pool.

Downward

For Series A PTCs: Credit enhancement (based on both internal and external credit enhancements) falling below 2 times the estimated base case shortfalls. For second loss facility: Credit enhancement (based on both internal and external credit enhancements) falling below 1.25 times the estimated base case shortfalls.
A sharp downgrade in the rating of the servicer/originator
Non-adherence to the key transaction terms envisaged at the time of the rating

Liquidity: Strong

The credit cum liquidity enhancement available in the transaction is Rs. 38.13 crore (9.9% of the pool principal) which is in the form of 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.

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

About the pool

The pool cash flow is securitised and comprises receivables from vehicle loans originated by STFCL. The pool has a weighted average net seasoning of 8.3 months, with top 3 states (Karnataka. Andhra Pradesh, and Tamil Nadu) cumulatively accounting for 41.2% of the pool principal. Average ticket size of the pool is Rs 3.8 lacs. All the contracts continue to be current as on the cut-off date (i.e. September 20, 2022).

Rating Assumptions

To assess the base case shortfalls for the transation, CRISIL Ratings has analysed the static pool information (with information on 90+DPD) on new and used vehicles portfolio of STFCL for originations in the period FY2013 to FY2022 (with performance data till June 2022). CRISIL Ratings has also analysed the portfolio cuts based on Tenure, Ticket Size, State, IRR etc. and compared the pool with the portfolio on these parameters.

CRISIL Ratings has also analysed performance of rated securitisation transactions, and the performance of STFCL’s portfolio. As of June 2021, 90+dpd for the used and new portfolio are 2.6% and 6.0%, respectively.

CRISIL Ratings has also factored in pool-specific characteristics and estimated the base case peak shortfalls in the pool in the range of 5.0-7.0% of pool cash flows.

CRISIL Ratings has assumed a stressed monthly prepayment rate of 0.3 to 1.3% 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 adequately factored in the risks arising on account of counterparties (refer to counterparty details)
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.

Counterparty details

Capacity	Counterparty Name	Counterparty Rating/ Track record	Effect on credit ratings in case of non-performance
Originator and seller	STFCL	Rated ‘CRISIL AA+/CRISIL PPMLD AA+r/Stable/CRISIL A1+’	No effect.
Servicer	STFCL	Rated ‘CRISIL AA+/CRISIL PPMLD AA+r/Stable/CRISIL A1+’	Significant effect, because of change in servicing quality and replacement cost of servicer (not factored in by CRISIL Ratings, given its rating on servicer). However, CRISIL Ratings does not envisage the requirement for replacement.
Collection & Payout Account	TBD	TBD	Negligible effect. Account bank can be changed without impacting the rating.
Second loss facility in the form of Fixed Deposit	TBD	TBD	Negligible effect. Bank with whom the fixed deposit is maintained can be changed without impacting the rating.
First loss facility in the form of Fixed Deposit	TBD	TBD	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

STFCL, incorporated in 1979, is the flagship company of the Shriram group. It is registered with RBI as a deposit-taking, asset-financing non-banking financial company. STFCL provides financing for vehicles such as CVs (both pre-owned and new), tractors, and passenger vehicles. It has pan-India presence, with about 1,854 branches and 775 rural centres as on March 31, 2022.

STFCL’s reported total income (net of interest expense) and profit after tax (PAT) of Rs 9,540 crore and Rs 2,708 crore respectively, for fiscal 2022.

Key Financial Indicators

Particulars	Unit	March 2022	March 2021	March 2020
Total assets	Rs. Cr.	1,42,106	1,29,679	1,14,129
Total income (net of interest expenses)	Rs. Cr.	9.540	8,382	8,312
PAT	Rs. Cr	2,708	2,487	2,502
Gross NPA	%	7.07	7.06	8.36
Overall capital adequacy ratio	%	22.97	22.50	20.27
Return on managed assets (annualised)	%	2.0	2.0	2.5

Past rated pools

CRISIL Ratings has ratings outstanding on 21 securitisation transactions originated by STFCL. CRISIL is receiving monthly performance reports pertaining to these transactions.