CRISIL has converted its provisional rating assigned to Rs 1300 crore of perpetual bonds of TMF Holdings Limited (TMFHL) to final rating of 'CRISIL AA-/Negative'. TMFHL had previously completed issuance of Rs 500 crore of perpetual bonds in two tranches. TMFHL has confirmed that the final term sheet for the balance Rs 1300 crore would be similar to the term sheet for the previously issued perpetual bonds. CRISIL has also reaffirmed its ratings on the other debt instruments of TMFHL at 'CRISIL AA-/Negative/CRISIL A1+'.
 
CRISIL ratings continue to be centrally based on the expectation of strong support from TMFHL's ultimate parent Tata Motors Limited (TML; rated 'CRISIL AA-/Negative/CRISIL A1+') to TMFHL and TMFHL's two subsidiaries, Tata Motors Finance Limited (TMFL; 'CRISIL AA-/CRISIL A/Negative/CRISIL A1+') and Tata Motors Finance Solutions Limited (TMFSL; 'CRISIL AA-/Negative/CRISIL A1+'). This is because of the high strategic importance of the companies to TML, being captive financiers. The ratings also factor in the group's strong position in commercial vehicle (CV) finance segment. However, these rating strengths are partially offset by moderate, albeit improving asset quality of the portfolio.
 
TMFHL is a non-banking financial company core investment company (NBFC-CIC/CIC). RBI's Master Direction - Core Investment Companies (Reserve Bank) Directions 2016 (CIC Directions¹⁾ prescribes that adjusted net worth of a CIC shall at no point of time be less than 30% of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items as on the date of the last audited balance sheet as at the end of the financial year. Also, CIC Directions require that the outside liabilities of a CIC shall at no point of time exceed 2.5 times its adjusted net worth as on the date of the last audited balance sheet as at the end of the financial year.
 
With respect to perpetual debt instruments to be issued by a CIC, there are no specific regulations issued by RBI unlike that for a NBFC. Therefore, in order to analyse the critical aspects of this issuance, CRISIL has analysed the term sheet in order to ascertain the differences between the perpetual and other debt instruments of the company. The key difference between normal debt and perpetual debt for TMFHL are the lock-in features which allow coupon deferability if:

1. a) The ratio of its adjusted net worth to its aggregate risk weighted assets ('ANW Ratio'Â?) is below the minimum regulatory requirement under the CIC Directions; or 

b) the impact of such payment results in its ANW Ratio falling below or remaining below the minimum regulatory requirement prescribed under the CIC Directions;

2. In the event that making of any Coupon payment by the Issuer may result in net loss or increase the net loss of the Issuer, the making of such of Coupon payment by the Issuer shall be subject to the prior approval of such governmental authority/ regulator, if applicable and such payment shall be made subject to such terms and conditions as may be prescribed by such authority/regulator

TMFHL cannot consider the perpetual debt as part of Networth for the purpose of ANW Ratio prescribed as per CIC Directions, while it would be considered as part of Total Outside Liabilities for the purpose of Leverage Ratio. As on March 31, 2020, the ANW ratio of TMFHL was 64.55%. The management also intends to maintain the ANW ratio above 50% at all points in time. Consequently, CRISIL believes that there is adequate cushion over the regulatory threshold of 30%. Even the leverage ratio for TMF Holdings has been well within the regulatory requirement (at a cap of 2.5 times) providing sufficient cushion.
 
With respect to the condition on net loss, there are no regulations currently applicable and hence this clause is not applicable as on date.
 
Additionally, in the current term sheet, there is a coupon discretion clause. The clause provides that the payment of any coupon in respect of the perpetual bonds may be cancelled or suspended at the discretion of the Board of Directors of TMFHL. CRISIL does not expect TMFHL to exercise this discretion as it would have a direct bearing on the other debt instruments of the company and the TMFHL group's ability to raise future borrowings in the market.
 
Further, the proposed bond issuance has an additional layer of comfort for investors with an option provider clause linked to parent, TML. If the investors decide to exercise the put option at pre-defined dates, there is an obligation on TML to purchase the perpetual bonds from the investor. However, from a rating perspective, the exercise of option only results in change of the holder of bonds from existing investor to TML and would not result in redemption/ extinguishment of the Bonds.
 
Any change in regulations or guidelines governing perpetual debt instruments which may have an adverse impact on the instrument features and will be a rating sensitivity factor.
 
The provisional rating for the balance perpetual instruments will be converted to a 'final' rating once CRISIL receives the final version of transaction documents including final term sheet.

CRISIL's ratings on the debt instruments of TMFHL continue to be based on the expectation of strong support from TML. This is because of TMFHL's strong strategic importance to TML.  CRISIL has also combined the business and financial risk profiles of TMFHL and its subsidiaries TMFL and TMFSL, given the integration of operations and commonality of management.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Strengths
* High strategic importance to and expectation of strong support from TML
CRISIL's ratings on the debt instruments and bank facilities of TMFL are based upon the expectation of strong support from the ultimate parent TML. This is because of the high strategic importance of TMFL to its parent and also the latter's majority ownership in TMFL through its wholly owned subsidiary, TMFHL.
 
Post the restructuring in fiscal 2017, TMFHL became the holding company for the financial services business of TML. TMFL undertakes financing of new vehicles and is the captive financier for TML's vehicles. TMFSL provides financing for pre-owned vehicles and has strong operational linkages with TML's pre-owned vehicles business and corporate lending, wherein it provides both short-term and long-term financing to dealers and suppliers of TML. The three companies are expected to receive significant business, financial and managerial support from TML.
 
In the past, TML has been infusing equity capital into TMFHL (including in its earlier form as TMFL, the operating company) at regular intervals. TML infused Rs 300 crore in fiscal 2018, Rs 600 crore in fiscal 2019 and Rs 150 crore in fiscal 2020. CRISIL believes TML will continue to provide similar support through TMFHL, enabling the companies to maintain their capital adequacy above the minimum requirement.
 
Consequently, TMHFL infused Rs 300 crore of equity into TMFL and subscribed to Rs 370 crore of Compulsorily Convertible Preference Shares issued by TMFL and Rs 150 crore of subordinated debt issued by TMFL in fiscal 2019. Furthermore, in the first quarter of fiscal 2020, TMFHL has infused Rs 150 crore of equity and subscribed to Rs 300 crore of subordinated debt in TMFL.  The total capital ratio of TMFL was comfortable at 16.85% as on March 31, 2020 (15.25% as on March 31, 2019). CRISIL believes TMFL will continue to receive need-based support from TML through TMFHL, to maintain their capital adequacy above the minimum requirement.
 
TMFHL and its subsidiaries have a high level of managerial and operational integration, where the parent extends management support through representation of its senior management on the boards of TMFL and TMFSL. CRISIL believes TML will continue to have majority ownership in TMFL through the holding company structure. This, along with operational integration and a shared brand name, makes TML morally obligated to support TMFL.
 
* Leading position in CV finance
The TMFHL group is a leading vehicle financier in India and TMFL is among the top five CV financiers with assets under management (AUM) of Rs 30,741 crore as on March 31, 2020 (Rs 29,370 crore as on March 31, 2019, and Rs 21,035 crore as on March 31, 2018). As on March 31, 2020, TMFSL had a standalone portfolio of Rs 5,205 crore (Rs 5,805 crore as on March 31, 2019, and Rs 3,928 crore as on March 31, 2018). The consolidated AUM stood at Rs 35,946 crore as on March 31, 2020 (Rs 35,175 crore as on March 31, 2019, and Rs 24,963 crore as on March 31, 2018).
 
Weakness:
* Moderate asset quality
TMFHL's consolidated asset quality is expected to be reflective of the nature of the subsidiaries' businesses, which are tilted predominantly in favour of financing TML's key customer segments such as super-strategic customers, strategic customers and first-time users of CVs. First-time users are generally not catered to by traditional CV financiers as the inherent credit risk in some of the customer segments is relatively high. In the past couple of years, TMFL has revised its business strategy with increasing share of strategic and super-strategic customers who are expected to have better risk profiles than first-time users.
 
TMFL's gross non-performing assets (GNPAs) stood at 5.89% as on March 31, 2020 (2.9% as on March 31, 2019, 4.7% as on March 31, 2018 and 9.8% as on March 31, 2017) while the net NPA stood at 5.10%.  TMFSL's GNPAs stood at 4.58% as on March 31, 2020 (1% as on March 31, 2019, 1.37% as on March 31, 2018 and 47.2% as on March 31, 2017) while the net NPA stood at 3.86%). Consolidated GNPAs have increased to 5.68% as on March 31, 2020 (2.6% as on March 31, 2019 and 4.0% as on March 31, 2018). While TMFSL's NPAs have come down significantly compared to previous fiscals on account of write-off of its manufacture guaranteed book portfolio with full loss cover from TML, there has been some increase in fiscal 2020, as collections were impacted because of overall slowdown in the economy.
 
The ability of the TMF group to manage asset quality in the current economic environment remains a key monitorable.

CRISIL's analysis of TMFHL's asset liability maturity (ALM) profile as of March 31, 2020 (CRISIL adjusted; excluding lines of credit) shows negative cumulative mismatches in the maturity buckets above 15 days. With inclusion of the bank lines, there is no negative cumulative mismatch in buckets upto 1 year. However, given the ability of the TMFHL group to raise funds and expectation of strong support from the ultimate parent TML, the negative mismatch would be manageable.
 
As on September, 2020, total debt repayments till November 30, 2020 were Rs 310 crore for TMFHL on standalone basis. Against the same, TMFHL had cash and equivalents of Rs 84 crore, and ICD limits from TML of Rs 1000 crore.  TMFHL has also raised Rs. 400 crore of commercial paper in October 2020 with maturity in January 2020.
 
On a consolidated basis, as on September 30, 2020, the group had repayments of Rs 6266 crore till November 30, 2020 (of which Rs 1886 crore of CC/WCDL limits are expected to be rolled over). Against the same, the group had cash and equivalents of Rs 3212 crore, unutilised working capital bank lines of Rs 1766 crore and ICD lines of Rs 1000 crore from TML. Additionally, the group has sanctioned and unutilised bank term loans of Rs 1100 crore. TMF Group has also raised Rs 1800 crore of commercial paper in October 2020 with maturities between 3 to 11 months which will also support liquidity profile.
 
The collections of TMFL and TMFSL has been improving for the past few months, however, are below the pre-covid levels. The improvement in collections is expected to support the liquidity profile for TMF Group.

The rating outlook on TMFHL is closely linked to the rating outlook on TML. CRISIL believes that TMFHL will be strategically important to TML and will benefit from the financial and management support extended by TML. CRISIL will continue to closely monitor any development that can significantly alter the extent of support by TML. Changes in the rating outlook or ratings on TML may lead to similar changes in the rating outlook or ratings on TMFHL.

Rating Sensitivity Factors
Upward Factors
* Since the outlook is Negative, the rating is unlikely to be upgraded. Any such upward revision in rating will be driven a similar change in the rating outlook or rating of parent, TML
 
Downward Factors
* Downgrade in rating of TML by 1 notch or higher
* Any change in support philosophy of TML resulting in reduced support to TMF Holdings Group
*Sharp deterioration in the consolidated asset quality impacting the profitability and capital level of the TMF Holdings Group.

TMFHL is the holding company for the financial services business of TMF group. Following the business restructuring of the group, the company is reconstituted as a Core Investment Company (NBFC-CIC). This has been done to have a more focused approach to cater to the TML ecosystem of buyers, dealers and vendors.  It is expected that a CIC would be better able to manage the funding needs of the financial services businesses under TML. As a CIC, TMFHL would be required to maintain the ratio of group to non-group investments at 90% to 10%.  
 
For the year ending March 31, 2020, the company's standalone net profit stood at Rs 10.6 crore on total income (net of interest expenses) of Rs 30.1 crore as per IND AS against a net profit of Rs 3.7 crore on total income of Rs 22.6 (net of interest expenses) crore in the previous year. 

¹''CIC Directions'' shall mean the Master Direction - Core Investment Companies (Reserve Bank) Directions 2016 issued by the Reserve Bank of India, as the same may be amended, modified and replaced from time to time.

Any other information: Not applicable