Rating Rationale
September 09, 2019 | Mumbai
Northern Arc 2019 CV Voldemort
(Originator: Ess Kay Fincorp Limited)
'CRISIL AA- (SO)' and 'CRISIL A (SO)' converted from Provisional Ratings to Final Ratings for Series A1 PTCs and Series A2 PTCs  
 
Rating Action
Trust Name Details Amount Rated (Rs Cr) Outstanding Amount * (Rs Cr) Original Tenure (Months) Balance Tenure * (Months) Credit Collateral (Rs Cr) Ratings/ Credit Opinions Rating Action
Northern Arc 2019 CV Voldemort Series A1 PTCs 29.98 28.97 49 48 3.22 CRISIL AA- (SO) Converted from Provisional Rating to Final Rating
Series A2 PTCs 0.64 0.64 CRISIL A (SO)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
*After August 2019 payout
Detailed Rationale

CRISIL has converted the provisional ratings assigned to Series A1 and Series A2 pass-through certificates (PTCs) issued by 'Northern Arc 2019 CV Voldemort' to final rating of 'CRISIL AA- (SO)' and 'CRISIL A (SO)' respectively under a securitisation transaction originated by Ess Kay Fincorp Limited (ESKAFPL; rated 'CRISIL A/PP-MLD Ar/Stable').
 
CRISIL has received the final legal documents executed for this transaction. These executed documents are in line with terms of the transaction when provisional rating/credit opinion was assigned. Hence, CRISIL has converted the provisional rating/credit opinion to a final rating/credit opinion.
 
Please click on the following link for detailed information on CRISIL's policy on provisional rating:
Revision in CRISIL policy for assigning 'provisional' ratings
 
This transaction is backed by a pool of receivables from commercial vehicle (CV), tractor, and car loans originated by ESKAFPL. The ratings are based on credit support available to instruments, credit quality of the underlying pool of receivables, ESKAFPL's origination and servicing capabilities, and soundness of the transaction's legal structure.
 
The transaction has a 'Par with Excess Interest Spread (EIS)' structure. In exchange for a purchase consideration equal to 95.0% of future pool principal outstanding as on the cut-off date, ESKAFPL assigned the loan pool to 'Northern Arc 2019 CV Voldemort', a trust settled by Catalyst Trusteeship Limited (CTL), which issued instruments to investors. Investor payouts for Series A1 and Series A2 PTCs are supported by credit collateral and subordination of excess interest spread (EIS).
 
Total credit support available in the transaction at the time of securitisation was as below:

  • Internal credit enhancement in the form of scheduled cashflow subordinatinon (assuming zero prepayments) amounting to Rs 7.09 crore (22.0% of initial pool principal) ' including Rs 1.61 crore of principal overcollateralization (5.0% of initial pool principal) for Series A1 PTCs and Rs 6.19 crore (19.2% of initial pool principal) - including Rs 1.61 crore of principal overcollateralization (5.0% of initial pool principal) for Series A2 PTCs
  • External credit enhancement amounting to Rs 3.22 crore (10.0% of initial pool principal) in form of Fixed Deposit

Series A1 PTCs are senior and will have the first priority right on the trust property. These PTCs are entitled to receive timely interest payments on a monthly basis. Principal and interest payments for Series A2 PTCs are fully subordinated to payouts for Series A1 PTCs. The transaction envisages an ultimate repayment structure for principal payouts for both Series A1 and Series A2 PTCs. On maturity of Series A1 PTCs, Series A2 PTCs are entitled to timely interest payments on a monthly basis. ESKAFPL will continue to service loan contracts in the pool as the servicing agent.
 
As required, CRISIL has received the following final executed legal documents and other documents relevant to the transaction:

  • Trust deed
  • Deed of assignment
  • Power of attorney
  • Information memorandum
  • Legal opinion
  • Trustee's awareness letter
  • Auditor's certificate
  • Originator's representations and warranties letter
Key Rating Drivers & Detailed Description
Supporting Factors
  • Internal and external credit enhancement at the time of securitisation
    • External credit collateral in the structure amounting to Rs 3.22 crore (10.0% of initial pool principal) and internal credit enhancement from scheduled cashflow subordination (assuming zero prepayments) amounting to Rs 7.09 crore (22.0% of initial pool principal) ' including Rs 1.61 crore of principal overcollateralization (5.0% of initial pool principal) for Series A1 PTCs and Rs 6.19 crore (19.2% of initial pool principal) ' including Rs 1.61 crore of principal overcollateralization (5.0% of initial pool principal) for Series A2 PTCs
  • Repayment track record of contracts
    • All the contracts in the underlying loan pool were current on repayment as of the cut-off date
Constraining Factors
  • Geographic concentration
    • As of the cut-off date, loans originated in Rajasthan accounted for 62.5% of the pool principal, and loans originated in the top 3 states accounted for 91.9% of the pool principal.
About the Pool
The transaction is backed by receivables from pool of commercial vehicle, tractor, and car loan contracts. Contracts in the pool had a moderate seasoning profile as evidenced by a weighted average net seasoning of 8.1 months at the time of securitisation. Contracts in the pool are also highly geographically concentrated with the top 3 states accounting for 91.9% of the pool principal at the time of securitisation. As of the cut-off date, the average ticket size for contracts in the pool was Rs 3.3 lakh, with a weighted average loan-to-value (at disbursement) ratio of 81.6%. The weighted average interest rate for contracts in the pool was 20.0%, and all contracts were current on payment as of the pool cut-off date (June 23, 2019). CRISIL has adequately factored all these aspects in its rating analysis.

Rating Assumptions
To assess the base case shortfalls for the transaction, CRISIL has analysed Ess Kay's moving portfolio delinquency information for vehicle loans from April 2016 to March 2019, along with static pool performance for vehicle loans made FY13 onwards with performance up to March 2019. CRISIL has also analysed the portfolio cuts based on various parameters and compared the pool with the portfolio on these parameters. Ess Kay's overall portfolio delinquency (90+ POS as % of total POS) was 3.1% as of March 2019.
 
Based on these aspects and other pool specific characteristics, CRISIL has estimated base case peak shortfalls in the pool at 10.0-12.0% of cash flows.
  • CRISIL has assumed a stressed monthly prepayment rate of 0.3-0.8% in its analysis.
  • CRISIL does not envisage any risk arising on account of commingling of cash flows given CRISIL's short term view of servicer.
  • CRISIL has adequately factored in the risks arising on account of counterparties (refer to counterparty details below)
  • CRISIL 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 / Track record

Effect on credit ratings in case of non-performance

Originator & Seller ESKAFPL Rated 'CRISIL A/CRISIL PP-MLD Ar/Stable' No effect.
Servicer ESKAFPL Rated 'CRISIL A/CRISIL PP-MLD Ar/Stable' Significant effect, because of change in servicing quality and replacement cost of servicer (not factored in by CRISIL). However, CRISIL does not envisage the requirement for replacement.
Collection and Payout Account Bank ICICI Bank Rated 'CRISIL AA+/CRISIL AAA/Stable' Negligible effect. Account bank can be changed without impacting the rating.
Credit collateral in the form of Fixed Deposit DCB Bank Rated 'CRISIL AA-/Stable/CRISIL A1+' Negligible effect. Bank with whom the fixed deposit is maintained can be changed without impacting the rating.
Trustee CTL Adequate track record Negligible effect. Can be replaced at minimal cost.

About the originator
Ess Kay Fincorp Ltd, incorporated in 1994 is engaged in the business of providing financing for income generation activity (CV and MSME lending against self-occupied property), the company also extends loans for purchase of two-wheelers, tractors, construction equipment; and cars. Portfolio comprised commercial vehicle (54%), tractor (18%), Car (14%), MSME (10%) and two-wheeler (3%) as on March 31, 2019.
 
Profit after tax (PAT) was Rs 52.2 crore on total income of Rs 365 crore in fiscal 2019 against a PAT of Rs 22 crore on total income of Rs 227.3 crore in the previous fiscal. Profitability improved in fiscal 2019 owing to improvement in net interest income and reduction in operating expenses.

Liquidity Position 
The credit collateral available in the transaction is Rs 3.22 crore (10.0% of initial pool principal) which is in the form of fixed deposit. At the time of securitisation, the credit collateral fully covered 10 months of interest payout obligations to Series A1 PTCs even with no collections from the underlying loan pool. The principal repayment on Series A1 PTCs is promised on an ultimate basis. Principal and interest payouts to Series A2 PTCs are fully subordinated to Series A1 PTCs payouts.
 
Liquidity: Strong
Liquidity is strong given that the credit enhancement available in the structure is sufficient to cover losses exceeding 1.5 times the currently estimated base shortfalls
 
Rating Sensitivity factors
Upward
* Credit enhancement (both internal and external credit enhancement) available in the structure exceeding 2.0 times the estimated base case shortfalls on the residual cash flows of the pool.

Downward
* Credit enhancement (both internal and external credit enhancement) falling below 1.5 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

Past Rated Pools
CRISIL has ratings outstanding on two securitisation transactions originated by ESKAFPL. CRISIL is receiving monthly performance reports pertaining to these transactions.
Key Financial Indicators
Particulars as on March 31 Unit 2019 2018
Total assets Rs crore 1993 1221
Total income Rs crore 365 227
Profit after tax Rs crore 52 22
Gross NPA (90+ POS on AUM) % 3.1 3.3
Overall capital adequacy ratio % 33.0 20.5
Adjusted gearing Times 3.2 5.5
On-book gearing Times 2.3 4.3
Return on managed assets % 2.6 1.8

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.
Annexure - Details of Instrument(s)
Type of Instrument Rated Amount
(Rs Cr)		 Date of Allotment  
Maturity
Date #		 Coupon Rate (%) (XIRR) Outstanding
Ratings/Credit Opinions		 Credit collateral
(Rs Cr) ^
Series A1 PTCs 29.98 05-Jul-19 17-Aug-23 12.24% CRISIL AA- (SO) 3.22
Series A2 PTCs 0.64 14.09% CRISIL A (SO)
# Indicates door to door tenure. Actual tenure will depend on the level of prepayments in the pool, and exercise of the clean-up call option
^ At the time of securitisation, additional credit support (assuming zero prepayment) from scheduled cashflow subordination of Rs 7.09 crore for Series A1 PTCs and Rs 6.19 crore for Series A2 PTCs
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Series A1 PTCs LT  28.97 CRISIL AA- (SO) 05-07-19 Provisional CRISIL AA- (SO)              
 Series A2 PTCs LT   0.64 CRISIL A (SO) 05-07-19 Provisional CRISIL A (SO)              
All amounts are in Rs.Cr.
Links to related criteria
CRISILs rating methodology for ABS transactions
Evaluating risks in securitisation transactions - A primer
Legal analysis in structured finance transactions

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