Fitch Assigns Expected Ratings to Shri Trust N 2017
Shri Trust N 2017
INR6.0bn Series A PTCs due April 2021: 'BBB-(EXP)sf'; Stable Outlook
The rating addresses timely payment of interest and principal in accordance with the payout schedules in the transaction documents. The scheduled payouts will be net of tax deducted at source on the income distributed by the trust to the PTC holders. The final rating is contingent upon the receipt of final documents conforming to information already received.
KEY RATING DRIVERS
The ratings and Outlook reflect adequate external credit enhancement (CE) of 9.25% of the initial principal balance as well as SFL's origination practices, servicing experience and expertise in collection and recovery of commercial-vehicle and tractor loans in India. The transaction is supported by a sound legal and financial structure.
The CE will be in the form of fixed-deposits with a bank rated 'BBB-/F3' by Fitch in the name of the originator with a lien marked in favour of the trustee. The CE is deemed sufficient to cover the servicer's commingling risks, payment-interruption risks and the liquidity for timely payment of the PTCs.
Fitch affirmed India's Long-Term Foreign - and Local-Currency Issuer Default Ratings at 'BBB-' in July 2016. Fitch expects India's real GDP growth to pick up to 7.7% in the financial year ending 31 March 2017 (FY17) and 7.9% in FY18. Fitch has factored this macroeconomic outlook into its analysis and base-case default-rate assumptions. The default rate, default timing, prepayment rate, recovery rate and time to recovery, together with the portfolio's weighted-average (WA) yield, were stressed in Fitch's ABS cash flow model to assess the sufficiency of cash flow for timely payment at the current rating level.
No interest-rate or foreign-currency risks exist in the transaction, since both the assets and PTCs are fixed-rate and denominated in rupees.
The transaction comprises a seasoned portfolio, with loans from 16 Indian states. The collateral pool will be assigned to the trust at par; and as of the 31 August 2016 cut-off date, it had an aggregate scheduled outstanding principal balance of INR6.0bn from 1 October 2016 and consisted of 4,430 loans to 4,030 obligors. The maximum obligor concentration is 0.27%. Typically, in applying Fitch's Global Consumer ABS Rating Criteria, the agency will expect the portfolio is consist of more than 10,000 obligors with one contract per obligor and the maximum obligor concentration is less than 0.05%. Fitch deems the characteristics of this portfolio as compatible with the Global Consumer ABS Criteria given that 100% are loans provided to individuals. The CE provided in the transaction adequately covers the loss from obligors accounting for over 0.05% of the current principal outstanding. The collateral pool had a WA original loan/value ratio of 85.1%, a WA seasoning of 9 months and a WA yield of 10.9%. Loans in the securitised pool were mostly current as of the cut-off date, with no overdue loans. Fitch gave some credit to WA seasoning of the underlying loans.
EXPECTED RATING SENSITIVITIES
Based on Fitch's sensitivity analysis, the agency may consider downgrading the rating on the transaction to 'BB(EXP)sf' if the base-case default rate increases by 30% or to 'BB+(EXP)sf" if the base-case recovery rate declines by 30%. The sensitivity analysis assumes the CE and other factors remain constant.
The rating may be upgraded if the ratings of the credit collateral banks holding the first-loss credit facility deposits are upgraded to above 'BBB-' and the portfolio performance remains sound, with adequate CE that can withstand stress above a 'BBB-sf' rating scenario.
SFL will assign commercial-vehicle and tractor loans to the issuer at closing, which in turn will issue the PTCs. The PTC proceeds will be used to fund the purchase of the underlying loans.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
REPRESENTATIONS, WARRANTIES AND ENFORCEMENT MECHANISMS
A description of the transaction's representations, warranties and enforcement mechanisms (RW&Es) that are disclosed in the offering document and which relate to the underlying asset pool is available by accessing the appendix referenced under "Related Research" below. The appendix also contains a comparison of these RW&Es to those Fitch considers typical for the asset class as detailed in the Special Report titled "Representations, Warranties and Enforcement Mechanisms in Global Structured Finance Transactions," dated 31 May 2016.
Fitch reviewed the results of a third-party assessment conducted on the asset portfolio information, which indicated no adverse findings material to the rating analysis.
Fitch conducted a review of a small targeted sample of SFL's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio.
Overall, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
SOURCES OF INFORMATION
The information below was used in the analysis:
- Loan-by-loan final pool data provided by SFL as at Aug 2016.
- Transaction documentation provided by SFL as at September 2016.
- 7-10 years of static monthly net default data of loans by SFL up to June 2016.
- 6-9 years of dynamic monthly net default data of loans by SFL up to June 2016.
- 7 years of prepayment data of loans by SFL up to June 2016.
- 6 years of recovery data of loans by SFL up to 2Q16.
The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public.