Rating Rationale
June 03, 2020 | Mumbai
IIERT Oct 2018 - II
(Originator: SREI Equipment Finance Limited)
Rating downgraded to 'CRISIL A+ (SO)' ; continues on 'Watch Negative'
 
Rating Action
Trust Name Details Amount Rated (Rs Crore) Outstanding Rated Amount
(Rs Cr)@		 Original Tenure (Months) Balance Tenure (months)@ Credit Collateral (Rs Cr)@ Ratings/ Credit Opinion Rating Action
IIERT Oct 2018 - II Series A PTCs 315.44 105.91 50 31 56.78 CRISIL A+ (SO)/Watch Negative Downgraded from CRISIL AA (SO)/Rating Watch with Negative Implications
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
@as after May 2020 payouts
Detailed Rationale

CRISIL has downgraded its rating on Series A pass-through certificates (PTCs) issued by 'IIERT Oct 2018-II' to 'CRISIL A+ (SO)' from 'CRISIL AA (SO)'. The rating remains on 'Rating Watch with Negative Implications'.
 
The rating action is driven by the weakening credit risk of SREI Equipment Finance Limited (SEFL; the originator and servicer in the transaction), potential medium term pressure on collections in the pool of receivables backing the PTCs. The rating also factors in the credit support available to the PTCs, SEFL's origination and servicing capabilities, and soundness of the transaction's legal structure.
 
The nationwide lockdown (originally till April 14, 2020) declared by the Government of India to contain the spread of the Novel Coronavirus (Covid-19) will have near-term impact on disbursements and collections of companies. The lockdown is now further extended till June 30, 2020 in Containment Zones with re-opening of the prohibited activities in a phased manner in areas outside Containment Zones. However, certain states have extended the lockdown till June 30, 2020. Herein, CRISIL believes that eventual lifting of restrictions will be in a phased manner. Any delay in return to normalcy will put further pressure on collections and asset quality metrics of NBFCs. Additionally, any change in the behaviour of borrowers on payment discipline can affect delinquency levels.
 
At present, the detailed contract-level collection report pertaining to April 2020 payout on the PTCs, mentioning the overdues and moratorium status, is not available with CRISIL. As per the payout details shared by Trustee, April 2020 payout only the interest dues were paid from the collections. CC was not utilised during the month as investor has amended payment terms of the transaction such that only interest payments on the PTCs are due on a monthly basis and principal is due by the final maturity date.
 
With respect to the overall portfolio of SEFL, the asset quality metrics measured in terms of stressed assets (including gross non-performing assets, repossessed stock and assets acquired in satisfaction of debt) continued to remain elevated at 12.2% at consolidated level as on December 2019. The asset quality metrics would further be impacted post implementation of the proposed scheme of arrangement involving transfer of the infrastructure book of SREI Infrastructure Finance Limited (SIFL) to SEFL. While the management had earlier taken steps to recover dues from some of the stressed accounts, there was a delay in the recoveries as anticipated till December 31, 2019. Further, amidst the lockdown due to Covid-19 and the macroeconomic environment, collections are expected to be impacted which could result in further deterioration of the asset quality metrics for SREI. Asset quality metrics in the near to medium term remain a key sensitivity factor.
 
Further with deterioration in the operating environment for NBFCs {non-banking financial companies (NBFCs) including housing finance companies} funding access for SEFL had impeded with the company primarily managing to raise funds through securitisation / direct assignment route. In fiscal 2020, the company has managed to raise around Rs 3862 crores of which Rs 3474 crore was via the securitisation/direct assignment route. Additionally, there were earlier expectations of the company being able to raise some funds via the ECB route, however, amidst the lockdown these issuances too have been delayed.
 
On the liquidity side, while the company has received moratorium from banks, the company's liquidity profile in the past was supported by regular pre-payments from some of their borrowers. Amidst the current environment, the prepayments are not expected to keep pace as earlier which could pressurise the liquidity position and also increase dependence of the company on timely fund raising to meet debt repayment obligations.
 
With pressure on asset quality, earnings could get impeded which in turn may impact the capitalisation metrics with the tier 1 and overall capital adequacy ratio of SEFL being close to the regulatory requirement of 10% and 15% respectively. However, the management intends to focus on growth through co-lending route and also increase securitisation, thereby reducing the capital requirement.
 
CRISIL will continue to monitor the asset quality performance of the pool of receivables backing the PTCs, and that of the overall portfolio of SEFL and thereby the operating performance of the company. CRISIL will also monitor the ability of SEFL to raise sufficient diversified resources especially from traditional routes at optimal costs. The progress displayed through various initiatives and its impact on asset quality and capitalisation metrics will be key rating sensitivity factors.

Key Rating Drivers & Detailed Description
Constraining Factors
  • Weakening credit risk profile of the servicer
    • In CRISIL's view, the credit risk profile of SEFL, the servicer in this transaction, has weakened. Consequently any deterioration in servicing capability would negatively impact the credit quality of the PTCs.
Supporting Factors
  • High amortisation and credit support available in the structure
    • As after April 2020 payout, the pool is amortised by 66.4%. Credit enhancement of Rs. 56.78 crore (50.1% of future investor payouts) is available in the structure.
Liquidity: Strong
Liquidity position is strong given that the credit enhancement (internal and external combined) in the structure is above 1.5 time the estimated base shortfalls on the residual pool cash flows.
 
CRISIL has adequately factored these aspects in its rating analysis
 
About the Pool
The pool comprises receivables from construction and healthcare equipment loans originated by SEFL.

Pool Performance Summary*
After April 2020 payouts Parameters
Asset class Construction and Healthcare Equipment loan receivables
Structure Par with Excess Interest Spread
Months post securitisation 19
Balance Tenure 31
Amortisation 66.4%
Credit collateral as a percentage of investor payouts 50.1%
Credit collateral utilisation (% of initial CC) 0.0%
Cumulative collection ratio (CCR)!   98.4% (after March 2020 payout)
Last 3 months average MCR!   99.1% (after March 2020 payout)
Total overdues $ 1.4%  (after March 2020 payout)
*Based on Trustee reports received
!CCR = {Total collections in the pool / (Total billings + opening overdues amounts at the time of securitisation)}
!MCR = Monthly collections in the pool / Monthly billings
$ Total overdues = (Total overdues plus loss on sale of repossessed assets in the pool expressed as a percentage of initial pool principal)

Key Rating Assumptions
To arrive at the rating, CRISIL has analysed the performance of the SEFL-originated pools under CRISIL's surveillance and latest portfolio data as of December 2019

Counterparty details

Capacity

Counterparty Name

Counterparty Rating / Track record

Effect on credit ratings in case of non-performance

Originator SEFL Not rated by CRISIL No effect.
Servicer SEFL Not rated by CRISIL Significant effect; Servicer's ability to service the securitised contracts is a key input to the rating of PTCs
Collection and Payout Account Bank ICICI Bank Rated 'CRISIL AAA/CRISIL AA+/Stable' Negligible effect. Account bank can be changed without impacting the rating.
First Loss Facility in the form of Fixed Deposit ICICI Bank Rated 'CRISIL AAA/CRISIL AA+/Stable' Negligible effect. Bank with whom the fixed deposit is maintained can be changed without impacting the rating.
HDFC Bank Rated 'CRISIL AAA/CRISIL AA+/Stable'
Trustee CTL Adequate track record Negligible effect. Can be replaced at minimal cost.

Rating sensitivities
Upward factors
  • Sharp improvement in the credit quality of the servicer / originator which results in an uplift in CRISIL's view on the entity by two notches or higher
Downward factors
  • Credit enhancement (internal and external combined) falling below 1.5 times the estimated base shortfalls on the residual pool cash flows
  • Further deterioration in the credit quality of the servicer/originator
  • Non-adherence to the key transaction terms envisaged at the time of the rating
About the Originator
Srei Equipment Finance Limited (SEFL) is registered with RBI as a non-deposit taking NBFC (Category-Asset Finance) and provides financial products and services to a wide spectrum of assets such as construction and mining equipment, information technology equipment and solutions, healthcare equipment and farm equipment. It is a wholly owned subsidiary of Srei Infrastructure Finance Limited (SIFL).
 
SEFL was a 50:50 joint venture between SIFL, India's only private sector infrastructure finance company; and BNP Paribas Lease Group (BPLG), one of the largest leasing groups in Europe. Pursuant to share purchase agreement dated December 29, 2015, executed between SIFL, BPLG, SEFL, SREI Growth Trust, Mr. Hemant Kanoria, and Mr. Sunil Kanoria, BPLG agreed (i) to acquire 2,51,54,317 equity shares of SIFL representing 5% of total paid up equity share capital and (ii) in lieu thereof, sell its entire shareholding of 2,98,30,000 equity shares in SEFL representing 50% of the total paid-up equity share capital to SIFL in accordance with applicable laws. The transaction was completed on June 17, 2016, when SEFL became a wholly owned subsidiary of SIFL.

Past rated pools
CRISIL has  rating outstanding on four transactions originated by SEFL. CRISIL is receiving monthly payout reports pertaining to the CRISIL-rated SEFL originated securitisation transactions.
Key Financial Indicators
Particulars Unit 2019** 2018 2017
Total Assets Rs. Cr. 26,605 24,502 17,230
Total income Rs. Cr. 4367 3321 2495
Profit after tax Rs. Cr. 306 264 149
Report Gross NPA % 6.2 1.8 2.4
Adjusted Gearing* Times 9.2 8.5 6.7
Return on assets % 1.2% 1.3% 0.9%
*Adjusted gearing is calculated as adjusted borrowings (onbook borrowings+ securitised portfolio)/networth
**As per IND-AS

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 (%) (p.a.p.m) Outstanding
Rating		 Credit cum liquidity Enhancement (Rs Cr.)
Series A PTCs 315.44 30-Oct-18 30-Dec-22 10.25% CRISIL A+ (SO)/Watch Negative 56.78^
*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
^Internal credit enhancement in the structure is not material
Annexure - Rating History for last 3 Years
  Current 2020 (History) 2019  2018  2017  Start of 2017
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Series A PTCs LT  105.91 CRISIL A+ (SO)/Watch Negative 24-04-20 CRISIL AA (SO)/Watch Negative Implications 10-10-19 CRISIL AA (SO)/Watch Negative Implications 30-10-18 Provisional CRISIL AAA (SO)      
            18-06-19  CRISIL AAA (SO)          
            01-03-19  CRISIL AAA (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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