Fitch Assigns Expected Rating to Shri Trust I 2016
Shri Trust I 2016
INR6.0bn Series A PTCs due April 2020: '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 distribution taxes 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 rating and Outlook reflects adequate external credit enhancement (CE), and SFL's origination practices, servicing experience and expertise in collection and recovery of commercial-vehicle loans in India. The transaction is supported by a sound legal and financial structure.
The CE comprises a first-loss credit facility (FLCF), which is in the form of fixed deposits with Axis Bank (BBB-/Stable/F3) and Canara Bank (BBB-/Stable/F3) in the name of the originator with a lien marked in favour of the trustee.
The credit enhancement is deemed sufficient to cover the servicer's commingling risks, payment-interruption risks, and the liquidity for timely payment of the PTCs. At closing, Shri Trust I 2016 had a CE of 9.5% of the pool's initial principal balance.
Fitch has revised its forecast for Indian real GDP growth for the full year ending in March 2016 (FY16) to 7.5%. GDP growth slowed to 7.0% in the first quarter of FY16 (2Q15) from 7.5% in the previous quarter, led by reduced net exports and private consumption growth. Moreover, rainfall during this year's monsoon season was below average. While the government is increasing its capital expenditure, it will likely reduce spending closer to the end of the fiscal year to meet the fiscal target.
Fitch continues to expect an acceleration of growth to 8.0% for FY17. The effect of gradual implementation of a number of structural reforms is expected to contribute to higher growth, although progress is lacking on big-ticket reforms such as the Land Acquisition Amendment Bill and the Goods and Services Tax. Monetary policy loosening is also likely to contribute to a pick-up in growth, although monetary transmission is limited given relatively weak banking sector health.
The agency has factored this macroeconomic outlook into its analysis and its 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 yield, were stressed in Fitch's Asia-Pacific Consumer 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 the PTCs are fixed-rate and are denominated in rupees.
The transaction comprises a seasoned portfolio, with geographical diversification in 12 Indian states. The collateral pool will be assigned to the trust at par, and as of 31 October 2015, it had an aggregate outstanding principal balance of INR6.0bn and consisted of 6,383 loans to 5,720 obligors. The collateral pool had a weighted average (WA) original loan-to-value (LTV) ratio of 81.7%, a WA seasoning of 11.2 months and a WA yield of 12.0 %. As of the cut-off date, loans in the securitised pool were mostly current, with no loans more than 30 days past due. However, some asset concentration existed in the heavy and medium commercial-vehicle loans, which comprised 91.1% of the portfolio, while 23.4% of the pool had LTV ratio in the range of 90% to 100%, although this is based only on the chassis value and the effective LTV range may be lower.
EXPECTED RATING SENSITIVITIES
Based on Fitch's sensitivity analysis, Fitch may consider downgrading the note rating of the transaction to 'BB(EXP)sf' if the base-case default rate increases by 30% or 'BB+(EXP)sf" if the base-case recovery rate declines by 30%. The sensitivity analysis assumes that the CE and other factors remain constant.
The note rating may be upgraded if the rating of the credit collateral bank holding the FLCF deposits is upgraded to above 'BBB-' and the portfolio performance remains sound, with adequate CE that can withstand stress at above a 'BBB-sf' rating scenario.
At closing, SFL will assign commercial-vehicle loans to Shri Trust I 2016, which in turn will issue the PTCs. The PTC proceeds will be used to fund the purchase of the underlying loans in each transaction.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch conducted a file review of 20 sample loan files focusing on the underwriting procedures conducted by SFL compared to SFL's credit policy at the time of underwriting. Fitch has checked the consistency and plausibility of the information and no material discrepancies were noted that would impact Fitch's rating analysis.
Fitch reviewed the results of the agreed-upon procedures (AUP) conducted on the portfolio. The AUP reported no material errors that would impact Fitch's rating analysis.
Included as an appendix is a description of the representations, warranties, and enforcement mechanisms.