Detailed Rationale

CRISIL Ratings has assigned its ‘Provisional CRISIL AA+ (SO)’ rating to Series A1 pass-through certificates (PTCs) and ‘Provisional CRISIL BBB+ (SO)’ rating to Series A2 PTCs issued by the Trust ‘Sansar Feb 24 II Trust’. The PTCs are being issued under a securitisation transaction backed by a pool of vehicle loan receivables originated by Shriram Finance Limited (SFL; rated ‘CRISIL AA+/Stable/CRISIL PPMLD AA+/Stable/CRISIL A1+’).

 

The provisional ratings are based on the credit enhancement available to support promised PTC payouts, the expected credit quality of the underlying pool, SFL’s origination and servicing capabilities, and the expected soundness of the transaction’s legal structure and payment mechanism.

 

The transaction has a ‘Par with EIS’ structure. SFL will assign the loan pool to ‘Sansar Feb 24 II Trust’, a Trust settled by the transaction’s Trustee, i.e. Catalyst Trusteeship Limited (‘CTL’) in exchange for a purchase consideration amounting to 100.0% of the initial pool principal as on the cut-off date. The Trust will issue Series A1 PTCs and Series A2 PTCs to investors for amounts equal to 95.0% and 5.0% of the initial pool principal as on the cut-off date, respectively. The Trustee will appoint SFL as the Servicer, and collections from the pool will be transferred to the Collection and Payout Account (CPA) on a monthly basis to make investor payouts as per the transaction’s waterfall mechanism.

 

Series A1 PTC holders are promised timely interest payments on a monthly basis. Principal repayment, while expected on a monthly basis, is promised only on an ultimate basis by the Series A1 PTC’s final maturity date. Post redemption of Series A1 PTCs, principal repayment to Series A2 PTC investors is expected on a monthly basis, but promised only on an ultimate basis by the Series A2 PTC’s legal final maturity date. Series A2 investors are expected to receive residual EIS amounts on a monthly basis, however, the rating on Series A2 PTCs only addresses the likelihood of principal repayment by the legal final maturity date, and not the payment of residual EIS amounts.

 

The investor payouts for Series A1 PTCs are supported by cash collateral, subordination of Series A2 PTC principal, and subordination of excess interest spread (EIS). On a monthly basis, the cash collateral can be used to make the promised interest payments to Series A1 PTCs in case of a shortfall in collections from the pool. On the Series A1 PTC’s final maturity date, the cash collateral can also be used to make the promised principal repayment in case of a shortfall in collections from the pool. Post the redemption of Series A1 PTCs, On the Series A2 PTC’s final maturity date, the cash collateral can also be used to make the promised principal repayment in case of a shortfall in collections from the pool.  Prior to the redemption of Series A1 PTCs, prepayment collections will be utilised for accelerated redemption of the Series A1 PTCs, and post the redemption of Series A1 PTCs, prepayment collections will be utilised for accelerated redemption of the Series A2 PTCs.

 

Credit enhancement available in the transaction structure to support promised PTC payouts is as below:

 

• External credit enhancement for Series A1 and Series A2 PTCs from a cash collateral amounting to Rs 48.15 crore (5.0% of the initial pool principal) which is expected to be maintained as fixed deposits with a bank and lien-marked in favour of the Trustee.
• For Series A1 PTCs, internal credit enhancement from subordination of Series A2 PTCs principal amounting to Rs 48.15 crore (5.0% of the initial pool principal), and subordination of scheduled EIS amounting to Rs 103.65 crore (10.8% of the initial pool principal).
• For the ultimate principal repayment of Series A2 PTCs, internal credit enhancement from subordination of scheduled EIS amounting to Rs 103.65 crore (10.8% of the initial pool principal).

Key Rating Drivers & Detailed Description

Strengths:

• Credit enhancement available in the structure:

• Series A1 PTCs are supported by external credit enhancement from a cash collateral amounting to Rs 48.15 crore (5.0% of the initial pool principal) and internal credit enhancement from subordination of Series A2 PTCs principal amounting to Rs 48.15 crore (5.0% of the initial pool principal), and subordination of scheduled EIS amounting to Rs 103.65 crore (10.8% of the initial pool principal).
• The ultimate principal repayment of Series A2 PTCs is supported by external credit enhancement from a cash collateral amounting to Rs 48.15 crore (5.0% of the initial pool principal) and internal credit enhancement from subordination of scheduled EIS amounting to Rs 103.65 crore (10.8% of the initial pool principal).

• Repayment track record of pool borrowers:

• As of the cut-off date, the pool loans had a weighted average seasoning of 9.9 months, leading to the aggregate disbursed principal for the pool amortising by 17.8% prior to securitisation. None of the pool loans were overdue as of the cut-off date.

 

Weaknesses:

• High proportion of tractor loans:

• 52.2% of the initial pool principal as of the cut-off date was contributed by loans extended to finance the purchase of pre-owned tractors. Compared to other portfolio segments, tractor loan borrowers are understood to have higher seasonality in their income. Historically, compared to other portfolio segments, tractor loans have also exhibited higher volatility in delinquency performance on the originator’s portfolio.

• Effect of potential macroeconomic headwinds:

• The pool’s collection performance could be hampered in a challenging macroeconomic environment and would remain susceptible to factors like increasing fuel costs, increasing interest rates, and demand moderation owing to inflation and geo-political uncertainties.
   

CRISIL Ratings has adequately factored these aspects in its rating analysis.

Liquidity: Strong for Series A1 PTCs, Adequate for Series A2 PTCs

For Series A1 PTCs: 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. The cash collateral available in the structure (Rs 48.15 crore, 5.0% of the initial pool principal) would cover the first six months of promised interest payments even in case of no collections from the underlying pool.

 

For Series A2 PTCs: Liquidity is adequate given that the credit enhancement available in the structure is sufficient to cover losses exceeding 1.1 times the currently estimated base shortfalls.

Rating Sensitivity factors

Upward factors:

• For Series A1 PTCs: Credit enhancement available in the structure adequately covering for 2.5 times the estimated base case shortfalls on the residual cashflows of the pool due to sustained healthy collections from the pool.
• For Series A1 PTCs: Credit enhancement available in the structure adequately covering for 1.4 times the estimated base case shortfalls on the residual cashflows of the pool due to sustained healthy collections from the pool.
   

Downward factors:

• For Series A1 PTCs: Credit enhancement available in the structure failing to cover 1.9 times the estimated base shortfalls on the residual cashflows of the pool due to weaker than expected collections from the pool.
• For Series A1 PTCs: Credit enhancement available in the structure failing to cover 1.2 times the estimated base shortfalls on the residual cashflows of the pool due to weaker than expected collections from the pool.
• A sharp downgrade in the rating of the servicer/originator.
• Non-adherence to key transaction terms envisaged at the time of assigning the rating.

 

About the pool

The securitisation transaction is backed by a pool of receivables from tractor, LCV, HCV, and CE loans (52.2%, 27.0%, 17.7%, and 3.1% of initial pool principal respectively) originated by SFL. As of the pool cut-off date (20-Mar-2024), the pool loans had a weighted average seasoning of 9.9 months, a weighted average interest rate of 14.2%, a weighted average LTV ratio of 67.9%, a weighted average original tenure of 47.7 months, and an average original loan amount of Rs 5.08 lakh. The top 3 states (Madhya Pradesh, Karnataka, and Rajasthan) contributed 39.0% of the initial pool principal. All the underlying pool loans were current on repayment as on the cut-off date.

 

Rating assumptions To estimate the base case shortfalls for the underlying pool, CRISIL Ratings has analysed the 90+ delinquency-cum-write-off performance of quarterly static pools of SFL’s new and used vehicle loan originations starting FY11, with performance information up to Dec-2023. CRISIL Ratings has also assessed the dynamic portfolio delinquency on SFL’s vehicle loan portfolio. As of Dec-2023, the 90+ delinquent proportions of SFL’s new and used vehicle portfolios were 3.6% and 3.1% respectively. On a segmented basis, the 90+ delinquent proportions on SFL’s HCV, LCV, PV, and Tractor portfolios were 3.8%, 2.0%, 2.5%, and 3.9% respectively as of Mar-2023. CRISIL Ratings has also evaluated the portfolio cuts and has compared the underlying pool with SFL’s aggregate vehicle loan portfolio based on parameters such as state, interest rate, loan tenure, and loan amount. CRISIL Ratings has also considered the pool performance of SFL’s previous securitisation transactions and has factored in pool-specific characteristics. CRISIL Ratings estimates the base case shortfalls in the range of 6.0-8.0% of the underlying pool’s cashflows. In addition, CRISIL Ratings has factored in the following: CRISIL Ratings has assumed a monthly prepayment rate of 0.5-1.5% of the initial pool principal. CRISIL Ratings does not envisage any risk arising on account of commingling of cash flows given its short-term rating on the servicer. CRISIL Ratings has factored in the risks arising on account of transaction counterparties. CRISIL Ratings has factored in sensitivities based on various shortfall timing curves (front-ended, back-ended and normal).

 

Counterparty details

Capacity	Counterparty	Rating	Effect on transaction rating in case of non-performance
Originator	SFL	CRISIL AA+/Stable/CRISIL PPMLD AA+/Stable/CRISIL A1+	No effect.
Servicer	SFL	CRISIL AA+/Stable/CRISIL PPMLD AA+/Stable/CRISIL A1+	Significant effect, because of change in servicing quality and replacement cost of the Servicer. However, CRISIL Ratings does not currently envisage the need for replacement. The Trustee, on behalf of the investors, shall retain the right to appoint a replacement Servicer in the occurrence of a ‘Servicer Event of Default’ as per the terms of the transaction.
Collection and Payout Account (CPA) Bank	The Hongkong and Shanghai Banking Corporation Limited	Not rated by CRISIL Ratings	Negligible effect. As per the terms of the transaction, the Trustee, on behalf of the investors, has the right to change the CPA Bank.
Cash Collateral Bank	The Hongkong and Shanghai Banking Corporation Limited	Not rated by CRISIL Ratings	Negligible effect. As per the terms of the transaction, the Trustee, on behalf of the investors, has the right to change the Bank with which the Cash Collateral fixed deposits are maintained.
Trustee	CTL	Not rated by CRISIL Ratings	Negligible effect. As per the terms of the transaction, the Trustee can be replaced by the investors holding majority interest.

 

 

Additional disclosures for Provisional ratings:

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

 Executed documents:

• Trust Deed
• Deed of Assignment
• First Loss Credit Facility Agreement
• Power of Attorney

 Other documents:

• Information Memorandum
• Legal Opinion
• Auditor’s Certificate(s)
• Trustee’s Letter
• Originator’s Representations and Warranties Letter

Additional documents, if any, executed for the transaction should also be provided along with the above documents. 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 in line with its policy on provisional ratings.

 

Rating that would have been assigned in absence of the pending documentation:

In the absence of 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 execution of certain documents by the issuer, as applicable. In case the documents received deviate significantly from the expectations, CRISIL Ratings may take appropriate action including placing the rating on watch or a rating change, depending on status of progress on a case-to-case basis. In the absence of the pending documentation, the rating on the instrument would not have been assigned ab initio.

 

About the Originator

Following the consummation of the merger of Shriram City Union Finance Limited (SCUF) and demerged undertaking of Shriram Capital Limited with Shriram Transport Finance Company Limited (STFCL), the company has been renamed to Shriram Finance Limited (SFL). Shriram Housing Finance Limited (SHFL) continues to operate as a subsidiary of SFL which holds around 84.2% stake in the SHFL. Pursuant to the consummation of the transaction, Shriram Capital Limited and SCUF cease to exist.

 

SFL, incorporated in 1979, was registered with RBI as a deposit-taking, asset-financing non-banking financial company and predominantly provides financing for vehicles such as CVs (both pre-owned and new), tractors, and passenger vehicles. Erstwhile SCUF (now merged into SFL) was incorporated in 1986 and operated in the retail financing segment with a focus on small enterprise loans, two-wheeler loans, gold loans, housing loans and others (auto and personal loans).

Key Financial Indicators

As on/for year ending Unit Dec-23 Mar-23 Mar-22 ^ Assets under Management (AUM) Rs crore 2,26,259 1,93,730 1,27,041 Total income (net of interest expenses) Rs crore 15,170 17,577 9,540 Profit after tax Rs crore 5,378 6,020 2,721 Gross NPA (Gross Stage-3) * % 5.6 6.0 7.0 On-book gearing Times 3.9 3.8 4.4 Return on managed assets % 3.1 3.0 2.0 * Gross Stage 3 estimated on combined basis for SFL and SHFL ^ Pre-merger

Performance of previously rated transactions

CRISIL Ratings has ratings outstanding on instruments issued under 20+ securitisation transactions backed by SFL-originated loans. CRISIL Ratings is receiving monthly performance reports pertaining to these transactions. The cumulative collection efficiency in the underlying pools for these transactions range from ~92% to ~100% as of Jan-2024 payouts, with 90+ delinquency remaining at or below 4.0% of the initial pool principal.

Annexure - Details of Instrument(s)

ISIN ^	Name of the instrument	Date of allotment	Coupon rate	Maturity date #	Size of the issue (Rs crore)	Complexity level	Rating assigned @	Cash collateral (Rs crore)
NA	Series A1 PTCs	21-Mar-2024	8.25% p.a.p.m.	24-Jan-2029	914.89	Highly complex	Provisional CRISIL AA+ (SO)	48.15
NA	Series A2 PTCs	21-Mar-2024	Variable (residual EIS)	24-Jan-2029	48.15	Highly complex	Provisional CRISIL BBB+ (SO)

1 crore = 10 million

^ ISIN details for instruments were not received as of date

# Indicates legal final maturity date for the instrument. Actual maturity date will depend on the level of collection shortfalls in the pool, the level of prepayments in the pool, and exercise of the clean-up call option.

@ The rating on Series A2 PTCs only addresses the likelihood of principal repayment by the legal final maturity date, and not the payment of residual EIS amounts.