Leo August 2022

(Originator: Ugro Capital Limited, acting through various co-lending and business correspondence partners)

'Provisional CRISIL A (SO)' assigned to Series A1 PTCs

 

Rating Action:

Trust Name	Details	Amount Rated (INR crore)	Pool Principal (INR crore)	Original Tenure (Months)	Cash Collateral (INR crore)	Rating @	Rating Action
Leo August 2022	Series A1 PTCs	33.22	38.62	27	2.84	Provisional CRISIL A (SO)	Provisional Rating Assigned

1 crore = 10 million

@ A prefix of 'Provisional' indicates that the rating centrally factors in the strength of specific structures, and is contingent upon occurrence of certain steps or execution of certain documents by the issuer, as applicable, without which the rating would either have been different or not assigned ab initio. This is in compliance with a May 6, 2015 directive ‘Standardizing the term, rating symbol, and manner of disclosure with regards to conditional/ provisional/ in-principle ratings assigned by credit rating agencies' by Securities and Exchange Board of India (SEBI) and April 27, 2021 circular ‘Standardizing and Strengthening Policies on Provisional Rating by Credit Rating Agencies (CRAs) for Debt Instruments’ by SEBI.

Detailed Rationale

CRISIL Ratings has assigned ‘Provisional CRISIL A (SO)’ to Series A1 pass-through certificates (PTCs) issued by ‘Leo August 2022’. The transaction is backed by Ugro Capital Limited’s (Ugro; rated ‘CRISIL A-/CRISIL PPMLD A- r/Stable/CRISIL A1’) share in receivables from unsecured business loans originated through various co-lending and business correspondence partners. The ratings are based on the credit support available to the PTCs, credit quality of underlying pool receivables, Ugro and its various partners’ origination and servicing capabilities, and soundness of the transaction’s legal structure.

 

This is the first transaction rated by CRISIL Ratings that is backed by receivables from loans originated under co-lending and business correspondence arrangements. Monthly principal and interest repayments from the underlying borrowers are apportioned between Ugro and its partners in a pre-determined split as per the terms of their co-lending and business correspondence agreements. The co-lending and business correspondence partners are responsible for collections from the underlying borrowers in the first instance, and repayments are deposited into a designated or joint escrow account out of which apportionments to the Ugro and its partners are made. The PTCs in this transaction are backed only by Ugro’s share in the underlying loan receivables from underlying borrowers, including overdue recoveries, which will be remitted by Ugro to the trust.

 

The agreements between Ugro and its partners also provide for loss protection in the form of first loss default guarantees (FLDGs) provided by the partners to Ugro. Once a contract breaches a pre-defined delinquency threshold (90 days past due, for example), Ugro is entitled to realise the future principal and overdue instalments pertaining to that contract out of the FLDG made available by the partner. In case of any future recoveries from such delinquent contracts against which the FLDG had been previously invoked, Ugro shall replenish or refund the partner’s FLDG previously invoked by an amount equal to the recovery. However, these FLDG arrangements have been kept out of the scope of this securitisation transaction and the PTC investors will not have recourse to any cashflows arising out of such arrangements that Ugro has entered into with its co-lending or business correspondence partners. Ugro has represented that until the PTCs are outstanding, it shall not invoke the FLDG in respect of the loans being securitised in this transaction.

 

Ugro, acting through various co-lending and business correspondence partners, will continue to service the pool contracts as the servicing agent. Ugro has represented that it retains the right to take over servicing from the various partners in accordance with the terms of their co-lending or business correspondence agreements. Ugro has also represented that it has an established presence in the geographies where pool borrowers are present, as well as the collection infrastructure necessary to take over servicing from partners if required. Relevant consents have also been provided by the co-lending partners which enable any back-up servicer appointed by the trust to take over servicing responsibilities for pool contracts from the partners, in case any such requirement arises.

 

The transaction has a 'Par with EIS' structure. Ugro will assign the receivables to ‘Leo August 2022’, a trust settled by Catalyst Trusteeship Limited (CTL), which will then issue Series A1 PTCs for 86.0% of the pool principal. Series A1 PTCs are entitled to monthly interest, while the principal repayment is promised on an ultimate basis by legal final maturity. The PTC investors’ recourse is limited to the extent of only Ugro’s share in the underlying loan receivables as per the co-lending arrangements with the partners, and cash collateral. It is pertinent to note that PTC investors will not have any recourse to the share of any co-lending or business correspondence partner in the underlying loan receivables.

 

The PTCs are supported by the cash collateral – in the form of fixed deposit - and cashflow subordination. The total credit support available in the transaction is as below:

 

• External cash collateral of Rs 2.84 crore (7.36% of initial pool principal)
• Internal credit support in the form of scheduled cashflow subordination, aggregating Rs 7.68 crore (assuming zero prepayments) - including Rs 4.39 crore of principal overcollateralisation (11.36% of initial pool principal) and Rs 1.02 crore of equity tranche PTC principal (2.64% of initial pool principal) for Series A1 PTCs.

Key Rating Drivers & Detailed Description

Strengths:

• Credit support available in the structure
  • External cash collateral in the structure amounting to Rs 2.84 crore (7.36% of initial pool principal) and internal credit enhancement from scheduled cashflow subordination (assuming zero prepayments) for Series A1 PTCs amounting to Rs 7.68 crore – including Rs 4.39 crore of principal overcollateralization and Rs 1.02 crore of equity tranche PTC principal.

 

• Repayment track record of contracts in the pool
  • The contracts in the pool have shown good repayment track record, with 98.3% of pool principal being contributed by contracts which have not exhibited any instance of delinquency prior to securitisation. The weighted average seasoning of the pool is 11.5 months (as measured from first EMI date to pool cut-off date) and it has amortised by 25.6% prior to securitisation.

 

Weakness:

• Risks inherent to unsecured SME financing
  • Borrower cash flows in the unsecured SME segment are vulnerable to adverse impacts on account of rising energy and input costs and a moderation in demand on account of an increased inflation and interest rate scenario. These macroeconomic headwinds may hamper the pool’s collection performance.

Liquidity: Adequate

The cash collateral available in the transaction is Rs 2.84 crore (7.36% of the pool principal) is in the form of a fixed deposit. Liquidity is adequate 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 (based on both internal and external credit enhancements) available in the structure exceeding 2.10 times the estimated base case shortfalls on the residual cash flows of the pool.

 

Downward

• Credit enhancement (based on both internal and external credit enhancements) falling below 1.7 times the estimated base case shortfalls.
• A sharp downgrade in rating of Ugro
• Non-adherence to the key transaction terms envisaged at the time of the rating, including various representations made by Ugro in the transaction documentation

 

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

Additional disclosures for Provisional ratings:

 

The provisional rating is contingent upon execution of the following documents:

• Trust deed
• Assignment agreement
• Accounts agreement
• Servicing agreement
• Power of attorney
• Information memorandum
• Legal opinion
• Trustee letter
• Representations and warranties letter
• CA certificate

 

Additional documents executed for the transaction, if any, should also be provided. The provisional rating shall be converted into a final rating after receipt of transaction documents duly executed within 90 days from the date of issuance of the instrument.

 

The final rating assigned post conversion shall be consistent with the available documents. In case of non-receipt of the duly executed transaction documents within the above-mentioned timelines, the rating committee of CRISIL Ratings may grant an extension of up to another 90 days.

 

Rating that would have been assigned in absence of the pending steps/ documentation: In the absence of pending documentation considered while assigning provisional rating as mentioned above, CRISIL Ratings would not have assigned any rating.

 

Risks associated with provisional nature of credit rating:

A prefix of 'Provisional' to the rating symbol indicates that the rating is contingent upon occurrence of certain steps or execution of certain documents by the issuer, as applicable. In case the documents received and/or completion of steps deviates significantly from the expectations, CRISIL Ratings may take an appropriate action including placing the rating on watch or a rating/outlook change, depending on status of progress on a case to case basis. In the absence of the pending steps / documentation, the rating on the instrument would not have been assigned ab initio.

About the Pool

The securitisation transaction is backed by Ugro’s share in a pool of receivables from unsecured business loans originated through various co-lending and business correspondence partners, namely Lendingkart Finance Limited (rated ‘CRISIL PPMLD BBB+r’), Digikredit Finance Private Limited (rated CRISIL BB+/Negative/CRISIL A4+), Inditrade Fincorp Limited (not rated by CRISIL Ratings), Nomisma Mobile Solutions Private Limited (not rated by CRISIL Ratings, trademark ‘ftcash’), and Riviera Investors Private Limited (rated ‘CRISIL BBB-/Stable’, wholly owned subsidiary of Indifi Technologies Private Limited). The pool had weighted average net seasoning of 11.5 monthly instalments as of the cut-off date. The average ticket size for pool loans is Rs 5.6 lakh with weighted average interest rate of 24.0% (however, weighted average hurdle rate is 14.1%, which is Ugro’s share in the underlying loans) and a weighted average original tenure of 33.3 months. All the contracts in the pool were current as on the pool cut-off date. CRISIL Ratings has adequately factored all these aspects in its rating analysis. At this point, it is not proposed to inform the underlying borrowers of the assignment of receivables.

 

Rating assumptions Ugro Capital Limited provides a spectrum of financing services to the MSME ecosystem across the country. Having started operations in Jan-19, the lender has been rapidly scaling up disbursements in the partnership and alliances segment since Jun-21, and as of Jun-22, Ugro had co-lending and business correspondence relationships with over 20 partners. In order to arrive the base case peak shortfall assumptions for this transaction, CRISIL Ratings has factored in the delinquency performance of Ugro’s partnership and alliances portfolio. The portfolio size stood at INR 563.7 crore as of Jun-22 with a 90+ delinquency of 2.5%. On a static pool delinquency basis, the peak 90+ observed was 10.5% for the Q3FY21 vintage, with more recent originations seeing peak 90+ delinquencies around 6%. CRISIL Ratings has further considered the limited seasoning for this portfolio, and the overall industry performance of unsecured loans as an asset class.   Based on these aspects, CRISIL Ratings has estimated base case peak shortfalls in the pool at 9.0% - 11.0% of cash flows.   CRISIL Ratings has also factored the following modelling assumptions, basis the typical industry characteristics of the asset class and its criteria for rating asset backed securitisations:   CRISIL Ratings has assumed a monthly prepayment rate of 0.8% to 1.2% under stressed scenarios in its analysis. CRISIL Ratings has adequately factored in the risks arising on account of counterparties (refer to counterparty details above). Based on CRISIL Ratings’ assumptions of various shortfall curves in its rating model, (front-ended, back-ended, and normal), CRISIL Ratings has evaluated the risk arising out of the different timings of shortfalls during the transaction’s tenure. CRISIL Ratings has also factored in the risk arising out of commingling of cash flows with the servicer, including co-lending and business correspondence partners

 

Counterparty details

Capacity	Counterparty Name	Counterparty Rating	Effect on credit ratings in case of non-performance
Originator	Ugro, acting through various co-lending and business correspondence partners	For Ugro: ‘CRISIL A-/CRISIL PPMLD A- r/Stable/CRISIL A1’	No effect.
Servicer	Ugro, acting through various co-lending and business correspondence partners	For Ugro: ‘CRISIL A-/CRISIL PPMLD A- r/Stable/CRISIL A1’	Significant effect, because of change in servicing quality and replacement cost of servicer. However, the Trust or investor has right to change the servicer with an intimation to CRISIL Ratings.
Collection and Payout Account Bank	ICICI Bank Limited	‘CRISIL AA+/CRISIL AAA/Stable’	Negligible effect. Account bank can be changed without impacting the rating.
Collateral in the form of Fixed Deposit	IDFC First Bank Limited	‘CRISIL AA/Stable/CRISIL A1+’	Negligible effect. Bank with whom the fixed deposit is maintained can be changed without impacting the rating.
Trustee	Catalyst Trusteeship Limited	Not rated	Negligible effect. Can be replaced at minimal cost.

 

About the Originator

UGRO is a systemically important NBFC engaged in financing secured and unsecured loans to MSMEs. It was incorporated in 1993 as Chokhani Securities Limited and was acquired and renamed as UGRO Capital Limited in 2018 by Mr. Shachindra Nath (Executive Chairman and Managing Director). The company is publicly listed on the Bombay Stock Exchange since 1995 and got listed on the National Stock Exchange in August 2021. Mr. Shachindra Nath is supported by seasoned key management personnel each having expertise of over a decade in their respective functional domains.

 

The company has raised capital from marquee private equity investors namely Newquest Asia Investments, Clearsky Investment holdings (ADV), Samena and DBZ Cyprus (PAG) who invested in the initial phase of UGRO’s evolution along with Mr. Shachindra Nath. The four investors together hold 68% as on March 31, 2022.

 

The company commenced its operation in January 2019 and had an AUM of Rs 2,969 crore as on March 31, 2022, of which Rs 2,491 crore was on-book. The company has diversified presence across 11 states with 91 branches as on March 31, 2022, with none of the states contributing more than 18% of the AUM as on March 31, 2022.

 

The company reported a PAT of Rs 15 crore on the total income (net of interest expense) of Rs 177 crore for the fiscal 2022 as against Rs 29 crore and Rs 109 crore, respectively, for the previous fiscal.

Key Financial Indicators

As on/for the period ending Unit 2022 2021 2020 Total assets Rs crore 2854 1751 1213 Total assets under management  (including off balance sheet) Rs crore 2969 1317 861 Total income Rs crore 313 153 105 Profit before tax Rs crore 20.2 12.1 3.32 Profit after tax Rs crore 15 29 20 90+ dpd of on-balance sheet portfolio % 1.7 2.3 0.9 Adjusted gearing* Times 2.1 0.9 0.3 Return on managed assets % 0.6 1.9 1.9

*Gearing is adjusted for the intangible assets on the balance sheet.

 

Past rated pools

This is the fourth securitisation transaction originated by Ugro that is being rated by CRISIL Ratings. CRISIL Ratings is receiving monthly reports from the trustee for two transactions where payouts have commenced.

Any other information: Not applicable

Annexure - Details of Instrument(s)

Type of Instrument	Rated Amount (INR crore)	Date of Allotment	Maturity Date #	Coupon Rate (p.a.p.m)	Complexity Level	Outstanding Rating &	Cash collateral (INR crore)
Series A1 PTCs	33.22	22-Aug-22	17-Nov-24	11.50%	Highly complex	Provisional CRISIL A (SO)	2.84*

1 crore = 10 million

# 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

& Series A1 PTC holders are entitled to receive timely interest on a monthly basis, while the principal payment is promised on an ultimate basis.

*Additional credit support includes Rs. 7.68 crore in form of scheduled cash flow subordination (assuming zero prepayments) – including Rs 4.39 crore of principal overcollateralization and Rs 1.02 crore of equity tranche PTC principal.