Sansar Trust July 2023

(Originator: Shriram Finance Limited)

'Provisional CRISIL AAA (SO)' assigned to Series A1 PTCs; 'Provisional CRISIL BBB+ (SO)' assigned to Series A2 PTCs

 

Rating Action

Trust Name	Details	Amount Rated (Rs.Crore)	Pool Principal (Rs.Crore)	Balance Tenure	Cash Collateral (Rs.Crore)	Ratings/ Credit Opinion@&	Rating Action
Sansar Trust July 2023	Series A1 PTCs	507.08	563.42	59	31.03	Provisional CRISIL AAA (SO)	Provisional Rating Assigned
	Series A2 PTCs	56.34		59	31.03	Provisional CRISIL BBB+ (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 & Bank Facilities

@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.

&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

 

Detailed Rationale

CRISIL Ratings has assigned its ‘Provisional CRISIL AAA (SO)’ ratings to Series A1 Pass Through Certificates (PTCs) and ‘Provisional CRISIL BBB+ (SO)’ to Series A2 PTCs issued by ‘Sansar Trust July 2023’ 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 two-wheeler and commercial vehicle loans originated by SFL. The rating is based on the credit enhancement available to the PTCs, the expected credit quality of underlying receivables, SFL’s origination and servicing capabilities, the transaction’s payment mechanism, 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 ‘Sansar Trust July 2023’, a trust settled by IDBI Trusteeship Services Limited (ITSL), which will in turn issue the Series A1 PTCs and Series A2 PTCs to investors.

 

The credit enhancements available in the transaction to support PTC payouts are described below:

• External credit enhancement from a cash collateral of Rs 31.03 crore (5.5% of pool principal) to support Series A1 investor payouts and Series A2 PTCs principal repayment.
• Internal credit enhancement for Series A1 PTCs from scheduled cashflow subordination aggregating to Rs 140.31 crore (24.9% of pool principal, assuming zero prepayments) – including subordination of Series A2 PTC principal of Rs 56.34 crore (10.0% of pool principal).
• Internal credit enhancement for Series A2 PTCs from the subordination of scheduled excess interest spread of Rs 83.97 crore (14.9% of pool principal, assuming zero prepayments).

 

Interest payments to Series A1 PTCs are expected and promised on a monthly basis. Principal repayment to Series A1 PTCs, while is expected a monthly basis, is promised only on an ultimate basis by the instrument’s legal final maturity date. However, the cash collateral would be used to meet shortfalls in monthly expected Series A1 PTC investor payouts (both interest and principal) as set out in the waterfall mechanism. An event of default on Series A1 PTCs would occur only in case the interest due to Series A1 PTC holders on any given payout date is not paid in full on that payout date, or if the Series A1 PTC principal is not repaid in full by the legal 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 instrument’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. Post redemption of the Series A1 PTCs, the cash collateral would be available to meet shortfalls in the ultimate principal repayment of Series A2 PTCs by the legal final maturity date.

Key Rating Drivers & Detailed Description

Strengths:

• Credit support available in the structure for Pass Through Certificates (PTCs)
  • Cash collateral of Rs 31.03 crore (5.5% of pool principal) provides credit support to Series A1 investor payouts and Series A2 PTCs principal repayment.
  • Series A1 PTCs also benefit from scheduled cashflow subordination aggregating to Rs 140.31 crore (24.9% of pool principal, assuming zero prepayments) – including subordination of Series A2 PTC principal of Rs 56.34 crore (10.0% of pool principal).
  • The principal repayment for Series A2 PTCs also benefits from the subordination of scheduled excess interest spread of Rs 83.97 crore (14.9% of pool principal, assuming zero prepayments).
• Repayment track record
  • The pool has a weighted average seasoning of 6.3 months. All contracts are current on repayment as of the pool cut-off date i.e., August 31, 2023.

 

Weakness:

• Risk profile of two-wheeler asset class
  • The originator’s two-wheeler loan portfolio has witnessed elevated delinquency levels in the past. While delinquencies in recent originations have seen improved delinquency performance, recoveries from delinquent borrowers remain limited owing to the modest income profile of underlying borrowers and small-ticket nature of underlying collateral. The pool’s collection performance would remain susceptible to risks inherent to two-wheeler financing.
• IRRs of commercial vehicle loans in the pool
  • Commercial vehicle loans with higher IRRs have exhibited higher delinquencies at the portfolio level, and the commercial vehicle component of the pool comprises entirely of such contracts, with IRRs ranging from 18-19%.

Liquidity: Strong

The cash collateral available in the transaction structure is Rs 31.03 crore (5.5% 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 2.9 times the currently estimated base shortfalls.

Rating Sensitivity factors

Upward

• For Series A1 PTCs: None
• For Series A2 PTCs: Credit enhancement (based on both internal and external credit enhancements) rising above 2.3 times the estimated base case shortfalls.

 

Downward

• For Series A1 PTCs: Credit enhancement (based on both internal and external credit enhancements) falling below 2.45 times the estimated base case shortfalls.
• For Series A2 PTCs: Credit enhancement (based on both internal and external credit enhancements) falling below 1.55 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.

About the Pool

The securitisation transaction is backed by a pool of receivables from two-wheeler (89.1% of initial pool principal) and commercial loans (10.1% of initial pool principal) originated by SFL. As of the pool cut-off date (August 31, 2023), the pool loans had a weighted average seasoning of 6.3 months, a weighted average interest rate of 21.5%, a weighted average LTV ratio of 80.5%, a weighted average original tenure of 28.7 months, and an average original loan amount of Rs 0.84 lakh. The top 3 states (Karnataka, Tamil Nadu and Andhra Pradesh) contributed 47.7% of the initial pool principal as of the cut-off date. All the underlying pool loans were current on repayment as on the cut-off date.

 

Key Rating Assumptions To assess the base case shortfalls for the transaction, CRISIL Ratings has analysed the static pool 90+ delinquency information on new and used vehicles loan portfolio of SFL for originations in the period FY13 to FY23 (with performance until June 2023). CRISIL Ratings has also analysed the portfolio cuts based on tenure, loan amount, state, interest rates 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 SFL’s portfolio. As of June 2023, 90+ delinquency for SFL’s used CV, new CV, and two-wheeler portfolios were 3.3%, 4.7%, and 4.0% respectively.   CRISIL Ratings has also factored in pool-specific characteristics and estimated the base case peak shortfalls in the pool in the range of 6.0-8.0% 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 transaction counterparties. 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	Effect on credit ratings in case of non-performance
Originator and seller	SFL	Rated ‘CRISIL AA+/CRISIL PPMLD AA+/Stable/CRISIL A1+’	No effect.
Servicer	SFL	Rated ‘CRISIL AA+/CRISIL PPMLD AA+/Stable/CRISIL A1+’	Significant effect, because of change in servicing quality and replacement cost of servicer. However, CRISIL Ratings does not currently envisage the requirement for servicer replacement.
Collection & Payout Account	Citibank N. A.	Rated ‘CRISIL AAA/Stable/CRISIL A1+’	Negligible effect. Account bank can be changed without impacting the rating.
Cash Collateral in the form of Fixed Deposit	Sumitomo Mitsui Banking Corporation	Rated ‘CRISIL A1+’	Negligible effect. Bank with whom the fixed deposit is maintained can be changed without impacting the rating.
Trustee	ITSL	Not rated by CRISIL	Negligible effect. Can be replaced at minimal cost.

 

Additional disclosures for Provisional ratings:

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

• Trust Deed
• Deed of Agreement
• Power of Attorney
• Information Memorandum
• Legal Opinion
• Trustee 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.

 

About the Originator

Following the consummation of the merger of Shriram City Union Finance (SCUF) and demerged undertaking of Shriram Capital Limited with 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 85.02% stake in the same. Pursuant to the consummation of the transaction, Shriram Capital and SCUF cease to exist.

 

STFCL, incorporated in 1979, was 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.

 

SCUF, was incorporated in 1986 and predominantly operates 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 (CRISIL Ratings estimates)

Particulars (for the period ending)	Unit	Mar-23	2021
Total assets	Rs. Cr.	2,10,600	NA
Total income (net of interest expenses)	Rs. Cr.	17,577	NA
Profit after tax	Rs. Cr.	6,020	NA
Gross NPA (Gross Stage-3)	%	6.0*	NA
Adjusted Gearing	Times	3.8	NA
Return on assets	%	3.0	NA

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

 

Past rated pools

CRISIL Ratings has ratings outstanding on 22 SFL-originated securitisation transactions. CRISIL Ratings is receiving monthly servicer and payout reports pertaining to these transactions.

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)
NA	Series A1 PTCs	29-Sep-2023	8.75% p.a.p.m.	25-Sep-2028	507.08	Highly Complex	Provisional CRISIL AAA (SO)	31.03
NA	Series A2 PTCs	29-Sep-2023	Variable (residual interest)	25-Sep-2028	56.34	Highly Complex	Provisional CRISIL BBB+ (SO)	31.03

^%ISIN for instruments were not received as of date

^*Indicative date of allotment, the instruments are yet to be issued

^#Indicates legal final maturity date for the instruments. Actual maturity 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.