Fitch Assigns Expected Rating to Shri Trust J 2016
Shri Trust J 2016
INR4bn Series A PTCs due September 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 reflect adequate external credit enhancement (CE), and 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 comprises a first-loss credit facility (FLCF), which is in the form of fixed deposits with Axis Bank Ltd. (BBB-/Stable/F3), 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. At closing, Shri Trust J 2016 had a CE of 10.5% of the pool's initial principal balance.
Fitch affirmed India's Long-Term Foreign- and Local-Currency Issuer Default Ratings at 'BBB-' in December 2015. Fitch expects India's real GDP growth to pick up to 7.5% in the financial year ending 31 March 2016 (FY16) and 8.0% in FY17, from 7.3% in FY15.
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 Global 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 loans from 16 Indian states. The collateral pool will be assigned to the trust at par, and as of 31 January 2016, it had an aggregate outstanding principal balance of INR4bn and consisted of 4,982 loans to 4,488 obligors. The collateral pool had a weighted average (WA) original loan-to-value ratio of 81.4%, a WA seasoning of 11.3 months and a WA yield of 12.1%. As of the cut-off date, loans in the securitised pool were mostly current, with no loans more than 60 days past due.
EXPECTED RATING SENSITIVITIES
Based on Fitch's sensitivity analysis, Fitch 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 that the CE and other factors remain constant.
The rating may be upgraded if the rating of the credit collateral bank holding the first-loss credit facility 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. The credit collateral bank's rating is currently constrained by India's Long-Term Issuer Default Rating of 'BBB-'.
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.