Muthoot Fincorp Limited

Rating Reaffirmed

 

Rating Action:

Instrument Details	Amount Rated (Rs Cr)	Original Tenure (Months)	Ratings @	Rating Action
Non-Convertible Debentures	200.00	36	CRISIL AA+ (CE)/Stable	Rating reaffirmation

@The ‘CE’ suffix for instruments having explicit Credit Enhancement is in compliance with SEBI’s circular dated June 13, 2019.

Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA+ (CE)/Stable’ rating to Non-convertible Debentures (NCDs) issued by Muthoot Fincorp Limited (MFL; rated ‘CRISIL A+/CRISIL A-/Stable/ CRISIL A1+’).

 

The payouts to NCDs holders are supported by the following:

• Internal accruals of MFL, which is the primary obligor
• Unconditional and irrevocable guarantee (SPV guarantee) provided by Chingam Trust 2020, a Special Purpose Vehicle (SPV) to which MFL has assigned gold loan receivables with principal cover of 1.15 times the issue size; the SPV guarantee will be invoked on occurrence of any of the pre-defined trigger events. The cash flows from the assigned receivables will be utilized exclusively for making payouts to the NCDs holders on invocation of SPV guarantee
• Additional credit enhancement of Rs 14.00 crore (7.0% of issue size) is available and will be utilized to pay the NCD holders on the first payout date post trigger.

 

Investor are eligible to receive interest on a monthly basis. Payments of principal and interest are promised to the investor by legal final maturity. In case of temporary liquidity challenges from the underlying pool and non-payment of interest and/or principal to the investors before final maturity does NOT constitute a default on the NCDs. Also, issuer has a call option at the end of 23rd month.

For the first 14 months from issuance (till July 2021 payout), MFL has made timely interest payouts to the NCD holders. Also, on a monthly basis MFL has added additional gold loan assets conforming to the pre-defined eligibility criteria in order to meet the minimum security cover of 1.15 times the issue size. Additionally, no trigger event has happened till July 2021 payouts.

 

The NCD investors have dual recourse to MFL and the guarantee provided by Chingam Trust 2020. MFL has assigned gold loan receivables to Chingam Trust 2020 with a cover of at least 1.15 times the issue size. In turn, Chingam Trust 2020 will provide unconditional and irrevocable guarantee to the NCD holders. Further, credit enhancement of Rs 14.00 crore (7.0% of issue size) is available to Chingam Trust 2020.

 

On each monthly payout date, MFL will transfer amount payable to the NCD holder to the Designated Account / Debenture Holder account to pay the NCD holders. Once the Designated Account is funded by MFL, the cash flows with the SPV is released to MFL. If MFL fails to fund the Designated Account / Debenture Holder account or on occurrence of any of the other trigger events, SPV guarantee is invoked and the cash flows from the assigned receivables will be used to make NCD payouts. In addition to the cashflows from the assigned receivables, the credit enhancement available will also be fully utilized post trigger to pay the NCD investors.

 

In the absence of the above structural features, the rating of the MLD would have been the same as the rating of the Issuer.

 

Analytical Approach

CRISIL Ratings has applied its criteria on rating asset-backed securities and instruments backed by guarantees for rating the NCDs. The (CE) suffix reflects the payment structure that is designed to ensure full and time-bound payment to NCDs holders.

 

Rating Assumptions

To assess the likely base case shortfalls on the assigned gold loan receivables, CRISIL Ratings has analysed the moving portfolio delinquencies till March 2021 and the static pool information for gold loan portfolio of MFL for the periods FY 2016 to Q1 FY 2020 (with performance data till December 2019). The 90+ dpd for the gold loan portfolio of MFL was 0.6% as of March 2021.

CRISIL Ratings has also factored in pool specific characteristics based on defined eligibility criteria and has estimated the base case shortfalls in the pool by the maturity of the transaction in the range of 6.0% to 10.0% of pool principal. 

Based on its assessment of MFL's short-term credit risk profile, CRISIL Ratings has factored in the risk arising out of commingling of cash flows. CRISIL Ratings has adequately factored in the risks arising on account of 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.

The interest payouts to the NCDs holders is 9.25% coupon payable to the investor on a monthly basis but promised on the final maturity date. Step-up interest is 2.0% coupon which is applicable post any trigger event. CRISIL Ratings has considered interest of 11.25% for its analysis.

Key Rating Drivers & Detailed Description

Strengths:

• Total support available in the structure
  • Three layers of protection are available to the NCD holders. MFL (rated CRISIL A+/CRISIL A-Stable/CRISIL A1+) is the primary obligor. In case MFL is not able to make the payments to NCD holders from internal accruals, the unconditional and irrevocable guarantee provided by Chingam Trust 2020 can be used. Further, additional credit enhancement of Rs 14.00 crore (7.0% of issue size) is available and will be utilized to pay the NCD holders on the first payout date post trigger.
• Availability of sufficient time frame for recovery from delinquent contracts
  • The final maturity of the NCDs is 36 months from the date of issuance. The receivables that fall due at least six months prior to the final maturity date of the debentures are to be included in cover calculation, hence there is a minimum tail period of 6 months for recoveries from overdue contracts

 

Weakness:

• Geographical concentration
  • As per eligibility criteria, the maximum concentration allowed from any state is 30% of the pool size.
• Potential impact of the pandemic on collections
  • In case of subsequent peaks of the Novel Coronavirus (Covid-19) pandemic, there could be pressure on collections and asset quality of the pool of receivables

 

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

As per the terms of the transaction, the credit enhancement is provided in the form of cash collateral by the issuer to be maintained with banks/financial institutions acceptable to CRISIL Ratings.

Liquidity: Strong

Liquidity is strong given the total support available to pay the NCD holders. Furthermore, principal and interest payouts are promised to the investors on an ultimate basis only. The absence of monthly promise in terms of interest and principal payouts enables the structure to withstand any temporary liquidity challenge.

Outlook Stable

The outlook is based on CRISIL Ratings’ rating outlook on MFL’s debt instruments and bank facilities.

Rating Sensitivity factors

Upward factors:

• Introduction of supportive legislations or regulations for covered bonds
  • CRISIL Ratings has received a legal opinion confirming the bankruptcy remoteness of the assigned gold loan receivables from the Issuer. However, currently, there is no supportive regulatory or legislative framework for covered bonds in the country and judicial precedence on the subject is non-existent.
• Performance of the assigned pool of receivables
  • Substantially better than expected performance of the underlying contracts in the pool resulting in collateral cover exceeding 3.0 times the estimated base shortfalls of the assigned gold loan receivables

 

Downward factors:

• Total external support available to the NCD holders falling below 2.0 times the estimated base case loss of the gold loan receivables of Chingam Trust 2020
• A sharp downgrade in the rating of the servicer/originator
• Non-adherence to the key transaction terms envisaged at the time of the rating

Adequacy of credit enhancement structure

The guarantee provided by the SPV is unconditional, irrevocable and along with the cash collateral provided by the issuer is sufficient to cover the entire rated amount. Trustee monitored payment mechanism is in place to ensure payment of interest and principal obligation on the rated debt by the maturity of the PP-MLD. The payment mechanism provides adequate timeline for the guarantor to make full and timely payments in case of default by the issuer.

 

Based on the eligibility criteria, trigger events and historical performance of gold loan portfolio of MFL, CRISIL Ratings has considered multiple scenarios to test the adequacy of the credit enhancement structure, including stress scenarios where the performance of the issuer deteriorates and the performance of the pool is significantly weaker than the base case portfolio performance. CRISIL Ratings believes that the instrument will have very high degree of safety regarding timely servicing of financial obligations even in the most likely stress scenarios.

Unsupported ratings  CRISIL A+

CRISIL has introduced 'CE' suffix for instruments having explicit Credit Enhancement feature in compliance with SEBI's circular dated June 13, 2019.

Key drivers for unsupported ratings

The key rating drivers of the unsupported rating are detailed in CRISIL Ratings’ latest rating rationale on debt instruments issued by MFL.

About the Company

MFL, set up in 1997, is a non-deposit-taking, systemically-important NBFC, engaged in lending against gold jewellery. It is the flagship company of the MPG, which has diverse business interests such as hospitality, real estate and power generation. The company also distributes mutual funds, and general and life insurance products, and operates in the money-transfer segment.

 

MFL (on standalone basis) had AUM of Rs 18,701 crore. MML had AUM of Rs 4,950 crore, MCSL (Rs 2,088 crore) and Muthoot Housing (Rs 1,255 crore) as on March 31, 2021.

Key Financial Indicators  MFL - Standalone (as per Ind-AS reporting)
As on/ for the period ended March 31   2021 2020  2019 Total managed assets # Rs crore 22,351 19,453 17,267 Total income Rs crore 3,233 2,726 2,485 Profit after tax Rs crore 370 219 155 Gross NPA % 1.9 1.9 2.6 Gearing # Times 5.9 5.3 4.8 Return on managed assets # % 1.8 1.2 1 # including off balance sheet assets
Key Financial Indicators  (For MPG) (as per Ind-AS reporting)
As on/ for the period ended March 31   2020 2019 Total managed assets Rs crore 28,130 26,415 Total assets under management Rs crore 24,103 21,569 Total income Rs crore 4,345 3,915 Profit after tax Rs crore 318 464 Gross NPA % 3.4 2.9 Gearing# Times 8.0** 7.2 Return on managed assets# % 1.2 2 #including off balance sheet assets and adjustment for real estate exposure ** 7.6 times as of March 31, 2020 post adjusting real estate assets which were monetised to avail borrowings

 

List of covenants

Key eligibility criteria for gold loan contracts: -

Parameter	Criteria as per the structure
Asset class	100% gold loan receivables
Tenure	All loans comprising the Identified Receivables to have an original maturity of either 6 months or 9 months
Residual Tenure	Minimum WA residual tenure of cover pool basis the following   Share of 6 months Minimum Weighted Average Maturity <10% 6 months 10-20% 5 months 20-50% 4 months >50% 3.5 months .
Interest rate	Minimum rate on the pool of 12% and weighted average rate on the pool of 18.0%
LTV of contracts	Max 75% LTV
Geographical concentration	Max 30% per state
Borrower concentration	Max ticket size of 10 lakh per borrower
Overdue status	No contracts in overdue at the time of assignment

 

Key trigger events for invocation of SPV guarantee

Parameter	Criteria as per the structure
Issuer payment obligation	a) Failure of the Issuer to meet monthly coupon payment on the NCDs b) Failure of the Issuer to exercise or honor the call option on the Call Option Date
Issuer rating	Rating downgrade of issuer to BBB+ or lower
Instrument rating	Rating downgrade of debentures to AA- (CE) or lower
Security cover	The issuer is unable to maintain the required security cover (receivables that fall due at least six months prior to the final maturity date of the debentures, and against assets not overdue by more than 30 days shall be considered for computing the cover)
OD contracts in 0-30 bucket	Maximum 5% of the contracts part of security cover calculation can be in 0-30 bucket
Issuer performance	a) Capital Adequacy of Issuer falls below 16% b) Gross NPA of the Issuer goes above 6%

 

Accelerated Redemption Event

Post occurrence of a trigger event, in case receivables are not deposited in C&P Account within the timelines agreed for deposit under payment mechanism for four consecutive instalments (fortnights) for any reason whatsoever and the minimum security cover[1] falls below 1x, it will be automatically considered as Accelerated Redemption Event (without any action from Debenture Trustee or SPV Trustee) and all the dues (including principal and interest outstanding) shall be payable within 30 calendar days from the date of such event.

 

Counterparty details

Capacity	Counterparty Name	Counterparty Rating / Track record	Effect on credit ratings in case of non-performance
Issuer / Servicer	MFL	Rated ‘CRISIL A+/CRISIL A/Stable/CRISIL A1+’	Significant effect, because of change in servicing quality and replacement cost of servicer. However, CRISIL Ratings does not envisage the requirement for replacement.
MLD Designated account	Axis Bank	Rated ‘CRISIL AA+/CRISIL AAA/Stable/CRISIL A1+’	Negligible effect. Account bank can be changed without impacting the rating.
C&P Account	ICICI Bank	Rated ‘CRISIL AAA/CRISIL AA+/Stable’	Negligible effect. Account bank can be changed without impacting the rating.
Credit collateral in form of fixed deposit (FD)	ICICI Bank	Rated ‘CRISIL AAA/CRISL AA+/Stable’	Significant Effect, because rating on MLDs will be directly linked to long term rating of the FD provider
Trustee	Catalyst Trusteeship Limited	Adequate Track Record	Negligible effect. Can be replaced at minimal cost.

 

[1] For the purpose of computing the cover post trigger event, cash in the C&P Account and the entire future principal against the cover pool assets (including overdue contracts) shall be included

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Type of Instrument	Rated Amount (Rs Cr)	Date of Allotment	Maturity Date	Coupon Rate (%) (p.a.p.m.)	Complexity Level	Outstanding Ratings
INE549K07634	NCDs	200.00	22-May-20	22-May-23	9.25%*	Highly Complex	CRISIL AA+ (CE)/Stable

* Step-up interest of 2.0% post trigger