Embed Size (px)
Citation preview
Structured Finance
www.indiaratings.co.in 8 March 2013
Auto Loans
STFCL CV Trust Dec 12 - I New Issue
Capital Structure
Class
Principal outstanding
(INRm) Final maturity
Long-Term rating CE
a(%) Outlook
TT (%)
TTLM (x)
b Complexity indicator
c
Series A1 PTCs
2,333.96 May 2017 IND AAA(SO) 10.90 Stable 100% 66.4 High
Series A2 PTCs
122.84 May 2017 IND AAA(SO) 10.90 Stable 100% 66.4 High
Second-loss credit facility
144.95 May 2017 IND A(SO) 5.00 Stable - - High
Closing Update: The transaction was closed on 31 December 2012. This report includes the key characteristics of the transaction as of the closing date. a Credit enhancement as a percentage of future principal outstanding as of 30 November 2012
b Details are provided in “Structured Finance Tranche Thickness Metrics”, 29 July 2011
c India Ratings‟ complexity indicators are an opinion on the relative complexity of a broad category of instruments
expressed on an ordinal scale of „Low Complexity‟, „Moderate Complexity‟ and „High Complexity‟. „High Complexity‟ refers to an instrument where the relationship between the numerous interdependent risk factors and intrinsic return characteristics is highly involved, requiring forward-looking analysis and projections
Transaction Summary
The transaction is a securitisation (par structure) of a pool of used and new commercial vehicle
(CV) loans originated by Shriram Transport Finance Co. Ltd. (STFCL, „IND AA‟/Stable/„IND
A1+‟). The final ratings are based on the quality of the collateral, the originating and servicing
capabilities of STFCL, the financial structure of the transaction and the available credit
enhancement (CE).
The final rating of Series A1 pass through certificate (PTC) addresses the timely payment of
interest and principal by the scheduled maturity, in accordance with the transaction
documentation. The final rating of Series A2 PTC addresses the timely payment of principal
only by the scheduled maturity date and that of the second loss credit facility (SLCF) addresses
the ultimate payment of principal by the scheduled maturity, in accordance with the transaction
documentation.
Key Rating Drivers
Performance: India Ratings maintains ratings on over 30 transactions originated by STFCL. In
these transactions, the 90+ days past due (dpd) delinquency ranges between 0% and 5.0% of
initial principal outstanding.
Base Case Default Rate: India Ratings has derived the base case net default rate from
historical static pools for loans originated from January 2003 to June 2012. The static pool
covers reasonable stress in the Indian economy in 2008-2009. The agency has assumed a
base case net default rate that reflects the stressful economic environment, which is above the
median observation of the static pool.
Asset Outlook: Broad-based economic growth, mostly focused on domestic consumption,
limits downside risk in CV loan pools. India Ratings‟ outlook on the CV loan asset class is
Stable to Negative (see 2012 Outlook: Indian Structured Finance, published 4 January 2012).
Rating Sensitivity: An analysis was conducted to study the impact on the rating of changes to
the assumed base case default rate and recovery rate. If the assumptions of both these factors
were individually worsened by 20%, the model-implied rating sensitivity suggests that the rating
will be downgraded by two notches.
Inside this report
Capital Structure 1
Transaction Summary 1
Key Rating Drivers 1
Transaction and Legal Structure 2
Disclaimer 4
Asset Analysis 4
Liability Analysis 9
Rating Sensitivity Analysis 9
Counterparty Risk 10
Performance Analytics 10
Appendix A: Origination and Servicing 12
Appendix B: Pool Characteristics 16
Appendix C 18
Related Research
2012 Outlook: Indian Structured Finance (January 2012)
Shriram Transport Finance Co. Ltd.: Credit Update (May 2012)
Analysts
Jatin Nanaware +91 22 4000 1761 [email protected] Amit More +91 22 4000 1703 [email protected]
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 2
Data Adequacy, Criteria Application and Model
STFCL has provided India Ratings with a set of data which includes key data fields used in the
agency‟s analysis of CV loan pools. STFCL also provided the agency with loan-by-loan data for
the current pool. The static pool data provided belonged to 10 vintages from 2001 to 2012 and
contained aggregated default rates by origination month, up to June 2012. Dynamic data
exhibiting delinquency rates by parameters such as geography, loan-to-value (LTV) ratio and
internal rate of return (IRR) was also made available.
The methodology used to rate the transaction is based on India Ratings‟ India ABS Criteria
Report, Rating Criteria for Indian Asset Backed Securitisations and Structured Finance Rating
Criteria, both published 12 September 2012 (see Applicable Criteria).
India Ratings‟ analysis used two models - the simulation model and the cash flow model. The
former was used to estimate gross default from net default rates. The cash flow model was
used to test whether the stressed asset cash flows as well as the CE provided in the
transaction were able to cover timely interest and principal payments for Series A1 PTCs,
timely payment of principal for Series A2 and the ultimate payment of principal to the second
loss credit facility.
Transaction and Legal Structure
The transaction has a par structure where the pool is assigned for a purchase consideration
equal to the pool‟s principal balance. The underlying loan receivables, including security
interest in any underlying assets, have been assigned to the trust for the benefit of the PTC
investors. Through such an assignment, the PTC investors have become the absolute legal
and beneficial owners of the respective loan receivables.
Figure 1
Structure Diagram
Note: This diagram represents India Ratings' interpretation of the transaction structure as represented in the transaction
documents
Source: Transaction documents
PTC Investors
PTC PayoutsPTC Issuance
ProceedsPTC
Issuance
Trust
Periodic Collection
Assignment of Loans
Purchase Consideration
Originator/Servicer
Loan Repayment
Loan
Underlying Borrowers
CE Provider
Payment Structure
The future payouts from the pool for each month will be collected by STFCL and deposited in
the collection and payout account (CPA) in the name of the trust, maintained with the approved
bank, not later than one business day before the scheduled payout dates. The PTC payouts,
consisting of the collections from the amounts due, amounts overdue and prepayments in the
month (M), are payable in M+1. This exposes the transaction to commingling risk. This risk is
mitigated by the current Short-Term Rating of the servicer and certain structural mitigants
mentioned in the transaction documents (see Counterparty Risk section).
Key Information
Pool Assets: Secured used and new
CV and passenger vehicle loans
Originator: STFCL
Servicer: STFCL
Account Bank: ICICI Bank Ltd
Credit Enhancement provider:
STFCL, in the form of fixed deposits in
the name of originator, with lien marked
in favour of trustee
Trustee: IDBI Trusteeship Services
Limited
Transaction Structure: Par
Opening Principal Outstanding:
INR2,456.8m (30 November 2012)
Pool Cut-Off Date: 30 November 2012
Series A1 PTCs Outstanding:
INR2,333.96m (30 November 2012)
Series A2 PTCs Outstanding:
INR122.84m (30 November 2012)
Scheduled Pool Maturity: April 2017
Scheduled Maturity for the PTCs:
May 2017
Applicable Criteria
Structured Finance Rating Criteria (September 2012)
Rating Criteria for Indian Asset-Backed Securitisations (September 2012)
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 3
Priority of Payments
On the payout date, the payments will be made from the available distribution amount in the
following order of priority:
Figure 2 Summary of Payments Waterfall
1 Statutory or regulatory dues payable by assignee 2 Overdue interest payouts to Series A1 3 Overdue principal payouts to Series A1 and Series A2 PTC investor 4 Scheduled interest payouts to Series A1 PTC investor 5 Scheduled principal payouts to Series A1 and Series A2 PTC investor 6 Replenishment of SLCF to the extent of utilisation 7 Replenishment of FLCF to the extent of utilisation 8 Interest Payouts to Series A2
Source: Transaction documents
Credit Enhancement
The transaction benefits from CE in the following forms:
Any future collections against the opening overdues as of 30 November 2012 would be
available to make good any future shortfalls and form a part of CE.
The internal CE in the form of excess interest spread (EIS), which, according to the
schedule, is 9.39% of total pool principal outstanding (POS). This arises as a spread
between underlying pool IRR and scheduled coupon to be paid to PTC investors.
The external CE of 10.90% of total POS will be made available to cover shortfalls on
account of default (90+dpd loans), temporary delinquencies (0-90 dpd loans) and pool
prepayments. The CE is divided into a first loss credit facility (FLCF) of 5.0% of total POS
and SLCF of 5.90% of total POS. The external CE is provided by the originator in the form
of fixed deposits held with an account bank.
Clean-Up Call Option
The originator/seller has a clean-up call option to repurchase fully performing residual loan
assets at par if, in aggregate, they form less than 10% of the original securitised pool balance.
This option will be applicable only to the performing assets at the sole discretion of the seller.
Legal Analysis
India Ratings reviewed the final transaction documentation to understand whether the terms
and structure of the transaction conformed to information previously received.
The key documents related to the transaction include the following:
The trust deed
The assignment agreement
The collection and servicing agency agreement
the first loss facility agreement
the second loss facility agreement
the power of attorney
The legal opinion provided by the transaction counsel opines on the following key issues:
Enforceability of documents: The transaction documents have been duly authorised,
executed and delivered and constitute legal, valid and binding obligations of the parties
thereto and are enforceable against each of them in accordance with their terms.
Adherence to the Reserve Bank of India (RBI) guidelines and true sale: The transaction
complies with the RBI Guidelines on Securitisation of Standard Assets dated 1 February
2006, 7 May 2012 and 21 August 2012. The assignment of the assets by the seller to the
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 4
trustee by way of the deed of assignment satisfies the test of a true sale as set out under
the securitisation guidelines.
Bankruptcy remoteness of assets: The assets purchased by the trustee are held by it in
trust for the benefit of the PTC holders and therefore would not form a part of the
originator‟s assets in the event of liquidation or winding up of the originator.
Bankruptcy remoteness of CE (FD) from the seller: The CE will be provided as fixed
deposits in a bank, rated at least „IND A‟/Stable by India Ratings, in the name of the
originator, to be held in trust for the benefit of trustee with a lien marked in favour of
trustee. The CE to be thus provided is bankruptcy remote from the originator. (see
Counterparty Risks section).
Valid constitution of the trust: The trust is validly constituted under the trust deed and will
be recognised as a duly constituted trust in accordance with the provisions of the Indian
Trusts Act, 1882.
Adherence to minimum retention requirement (MRR): The transaction adheres with the
MRR requirement as per the RBI‟s Securitisation Guidelines of 2012.
Disclaimer
For the avoidance of doubt, India Ratings relies, in its credit analysis, on legal and/or tax
opinions provided by transaction counsel. As India Ratings has always made clear, India
Ratings does not provide legal and/or tax advice or confirm that the legal and/or tax opinions or
any other transaction documents or any transaction structures are sufficient for any purpose.
The agency draws your attention to the disclaimer at the foot of this report, which makes it clear
that this report does not constitute legal, tax and/or structuring advice from India Ratings, and
should not be used or interpreted as legal, tax and/or structuring advice from India Ratings.
Should readers of this report need legal, tax and/or structuring advice, they are urged to
contact relevant advisers in the relevant jurisdictions.
Asset Analysis
India Ratings‟ asset analysis of the pool is based on a four-step process.
Step 1. An originator and servicer review
Step 2. Analysis of asset characteristics of the pool
Step 3. Base case assumptions are derived for three key performance variables: defaults,
recoveries and prepayments (based on historical data as well as the economic
environment and asset class outlook)
Step 4. Stressed scenarios are applied for the rating level
Originator/Servicer
India Ratings conducted a complete review of the originator/servicer of this transaction, and
such a review will typically be conducted at regular intervals. India Ratings‟ originator/servicer
review included an assessment of the origination and credit appraisal processes, the credit
underwriting process, collection and recovery processes, operational and financial stability, and
the soundness of its internal control procedures.
India Ratings has conducted the latest on-site operational review in October 2012 at Mumbai.
The agency is of the opinion that STFCL‟s origination and servicing capabilities are of an
acceptable standard. For the detailed originator and servicer review, refer to Appendix A.
The strengths and weaknesses of servicing and origination functions of STFCL are as follows:
Strengths
Increase in the number of field officers in tune with the rise in disbursement volumes in
recent years.
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 5
Officers who source the loans are also in charge of collections and a part of their salary is
linked to the collections.
Along with relationship-based credit appraisal, a thorough review of the underlying obligor
and the vehicle is conducted. STFCL maintains a valuation of around 700 products, which
is updated frequently.
Weaknesses and Mitigating Factors
The resolution of delinquent accounts is mainly focused on persuasion rather than that of
repossession. This may not be very effective in the current scenario where the earning
capacity of the obligor will be under pressure owing to a slowdown in the economy. This
weakness is mitigated by the fact that STFCL always has the option to repossess the asset
to recover the loan amount,
If the levels of originations increase beyond a certain limit, STFCL may find it difficult to
replicate the cash collection model in future. In the past, the management has proactively
increased the number of back-office personnel to address the increased level of workflow.
It is probable that if workflow increases in future, the management will take a similar action.
Asset Characteristics
Figure 3 Pool Characteristics (As of 31st October 12) Characteristic
Number of loans 4,840 Total principal o/s (INRm) 2,456.8 Total receivables o/s (INRm) 3,012.6 Average original loan (INR 000) 648.8 Average loan balance (INR 000) 507.6 Weighted average (WA) original LTV (%) 68.9 WA seasoning (months) 11.9 WA IRR (%) 14.2 WA original tenor (months) 49.9 WA balance tenor (months) 37.6 WA pool amortisation (%) 24.4 Delinquent (one month) (%) 6.4
Source: STFCL, India Ratings
Positive collateral characteristics include the following:
Diversified pool with presence in over 20 states
Adherence to minimum holding period requirement has led to WA Seasoning of 11.9
months and WA amortisation of 24.4% implying significant repayment track record
The negative collateral characteristics are:
6.4% of the loans on the cut-off date are one month overdue loans where overdue amount
is greater than INR 1,000
Base Case Assumptions
Having analysed the characteristics of the pool, India Ratings establishes its base-case
assumptions via the following three key performance variables, which collectively affect the
credit risk in a transaction:
default rate
recovery rate
prepayment rate
Default Rate
To estimate the base case default rate, India Ratings calculated the base case net default level
for vintage data since January 2003. The agency assumed 90+dpd loans as a percentage of
initial principal outstanding as the default proxy. As per the static pools, long-term average of
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 6
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12
90+dpd
Loan Origination Month
(%)
New CV - Peak 90+dpd Trend (Origination 2003-2012)
Source: STFCL
0.0
2.0
4.0
6.0
8.0
10.0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
(Months Since Origination)
WA 90+dpd (%) - New CV Static Pool
2003 2004 2005 2006 2007 2008 2009 2010 2011(%)
Source: STFCL
peak 90+dpd default rate for new and used CVs are presently in the range of 4.5% to 5.0% and
6% to 6.5% respectively.
Also, as per the static pool, newer vintages (2008 onwards) have shown much lower 90+dpd
rates than the long-term average for new CVs. However, for used CVs, certain recent vintages
of 2008 and 2009 observed higher-than-average default rates.
Although some of the 2008-09 static pools of used CV loans have demonstrated lower-than-
average 90+dpd default rates, the performance of 2009-10 static pools have significantly
improved. Also, in the six months ended June 2012, the worse performing 2008-09 vintages
have also moderated to acceptable levels, which indicates that the originator has been able to
stem further deterioration.
To arrive at the net base case default rate, India Ratings considers both long-term historical
average of the static pools and the performance of more recent static pools.
New Commercial Vehicles Figure 4
Figure 5
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 7
0.0
2.0
4.0
6.0
8.0
10.0
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58
(Months Since Origination)
WA 90+dpd (%) - Used CV Static Pool
2003 2004 2005 2006 2007 2008 2009 2010 2011(%)
Source: STFCL
Used Commercial Vehicles Figure 6
Figure 7
As the net default rates are net of recoveries, the agency has grossed them up by a suitable
multiplier - based on the historical recovery range and time to recovery - to determine the gross
default rates. The default rates assumed are in the range of 5.0% to 6.0% of the initial POS for
new CVs and 6.5% to 7.0% of the initial POS for used CVs. While determining the base case
default rate, variance in the contribution of any specific asset class in the pool as compared to
the overall portfolio has been considered and duly adjusted.
Loans in the 30 day past due delinquent basket are assumed to have a 10% higher default rate
than non-delinquent loans of a similar profile.
Pool-Specific Adjustments
India Ratings has assumed higher base case defaults for those segments of the pool that are
riskier than the portfolio average: lower seasoning, higher delinquency and higher interest rates
(IRRs). Similarly, appropriate benefit was given to that segment of the pool which has
significantly lower default probability: higher seasoning, lower IRR and lower LTV. Following
these adjustments, the agency assumed a base case gross default rate in the range of 4.5% to
5.5%.
Recovery Rate
India Ratings has derived the recovery rate from the static pool information. As per the
agency‟s discussions with the originator, most recoveries take the form of roll backs of 90+dpd
customers in the current bucket. The recovery time varies between six to 12 months. India
Ratings has assumed a base case recovery rate of 70%, with a base case recovery time of 12
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 8
months.
Prepayment Rate
As per the agency‟s experience in this asset class, prepayments have historically been low and
the monthly prepayment rate ranges from 0.1% to 1.0%. As per the data shared by the
originator, the monthly prepayment rate increases with seasoning. The agency also believes
that, due to low competition in CV financing, the economic slowdown, and high prepayment
penalties, it may be more difficult for obligors to refinance their loans. However, given the
availability of excess interest spread (EIS) in the transaction, India Ratings has assumed a
prepayment rate above the average prepayment rate observed to stress the EIS. The agency
has assumed a base case monthly prepayment rate of 0.25% in the first year since issuance
which increases thereafter.
Yield Compression
The agency reviewed the yield distribution of the assets in the securitised pool and assumed
that 40% of borrowers with the highest interest rate loans will either prepay or default. The
percentage reduction in the pool yield is then deducted from the month-on-month weighted-
average pool yield and applied to the interest collections in India Ratings‟ cash flow model.
Liquidity Risk
India Ratings observed the peak 0–90 day delinquencies for all static pools to determine the
liquidity shortfall the originator may face in case of a temporary delinquency, i.e., less than
90dpd.
Stress Scenarios
After developing base case assumptions for gross defaults, recoveries and prepayment rates,
India Ratings stressed these variables for the rating level.
Gross Default Rate Stresses
A stress multiple in the range of 4.0 to 5.5 is applied to the base case default rate in this
transaction. This range of stress multiple is commensurate with a „IND AAA(SO)‟ stress level
for Indian ABS ratings. The stress multiples have been benchmarked against historical peak
default data of Indian structured finance transactions.
Default Timing Stress
The timing of defaults has a significant impact on the performance of a transaction. India
Ratings formulates its default curves using historical performance data to observe trends
exhibited by static pools and fully seasoned securitisation transactions. The agency employs
various default timing scenarios depending on the assets tenure to assess the ability of the
structure to withstand various clusters of defaults at three different points in the transaction
lifecycle: front, middle and back, as shown in Figure 8.
Figure 8 Default Timelines Year (%) Front Middle Back
Year 1 60.0 40.0 30.0 Year 2 30.0 40.0 40.0 Year 3 10.0 20.0 30.0
Source: India Ratings
Recovery Rate Stresses
India Ratings‟ recovery rate stresses recognise the pro-cyclical nature of defaults and
recoveries, with lower recoveries occurring during periods of higher defaults. In ABS
transactions backed by secured loans, India Ratings assumes that the asset recovery rate is
inversely related to the rating level. For an „IND AAA(SO)‟ stress level, as in this case, the
recovery rate stress assumed is 60% of the base case recovery rate.
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 9
Liability Analysis
India Ratings uses its cash flow model to test whether the stressed asset cash flows, as well as
the CE and excess interest spread provided in the transaction, are able to cover the following:
The timely interest and principal payments to Series A1
The timely principal payments to Series A2
The ultimate principal payments on the rated SLCF
Cash Flow Modelling
India Ratings‟ cash flow model considers two sides of the transaction: the assets and the
liabilities.
Key assumptions for the asset side of the cash flow model are the base case defaults, timing of
defaults, recoveries, pool yield and prepayments. These assumptions are subject to rating-
specific stresses within the cash flow model.
Stressed asset cash flows are then applied to the liability side of the cash flow model, based on
the priority of payments/waterfall set out in the transaction documentation.
In summary, the stressed asset cash flows are applied to the specified liability waterfall. The
shortfall in each period is calculated to determine whether the CE provided in the transaction
exceeds India Ratings‟ break-even CE amount.
Rating Sensitivity Analysis
This section provides an insight into the model-implied sensitivities of the transaction when
base case assumptions, with respect to one or more variables, are changed, while holding
others equal. The results below should only be considered as one of the many potential
outcomes, given that the transaction is dynamically exposed to multiple risk factors.
Rating Sensitivity to Defaults
The rating migration that will occur if the base case default rate of each loan is increased or
decreased by a relative amount is demonstrated in Figure 9. For example, if the actual base
case default rate worsens by 20%, it will result in a rating downgrade of senior PTCs by one
notch.
Figure 9 Rating Sensitivity to Default Rate Series A1 & A2 PTC rating
Original rating IND AAA(SO) Base case increase by 10% IND AAA(SO) Base case increase by 20% IND AA+(SO)
Source: India Ratings
Rating Sensitivity to Recovery Rates
The rating migration that will occur if the base case recovery rate of each loan is increased or
decreased by a relative amount is demonstrated in Figure 10. For example, if the base case
recovery rate worsens by 20%, it will not result in any downward migration of the transaction.
Figure 10 Rating Sensitivity to Recovery Rates Series A1 & A2 PTC rating
Original rating IND AAA(SO) Base case decrease by 10% IND AAA(SO) Base case decrease by 20% IND AA+(SO)
Source: India Ratings
The section on rating sensitivities
provides information about the
sensitivity of the rating to model
assumptions. It should not be used as
an indicator of possible future
performance.
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 10
Rating Sensitivity to Shifts in Multiple Factors
Figure 11 summarises the rating sensitivity attributed to stressing default rate and recovery rate
assumptions concurrently.
Figure 11 Rating Sensitivity to Multiple Factors (Default Rate and Recovery Rate)
Default rate
Recovery rate Base case Base case + 10% Base case + 20%
Base case IND AAA(SO) IND AAA(SO) IND AA+(SO) Base case – 10% IND AAA(SO) IND AA+(SO) IND AA(SO) Base case – 20% IND AA+(SO) IND AA(SO) IND AA(SO)
Source: India Ratings
Counterparty Risk
Credit Enhancement Provider
The CE is maintained as fixed deposits in the account bank in the name of the CE provider
(STFCL) and with lien marked to the trustee. The counterparty risk is mitigated by a rating
trigger incorporated in the transaction documents. If the CE provider is downgraded below „IND
A‟/„IND A1‟ publicly or privately by India Ratings, the fixed deposit accounts will be transferred
in the name of the trustee within 30 calendar days.
Servicer
The agency recognises the importance of the servicing counterparty role fulfilled by STFCL
(„IND AA‟/„IND A1+‟) in the performance of the underlying loan portfolio.
The transaction documents contain a servicer replacement event, where, if the servicer‟s rating
falls below „IND A1‟ or „IND A‟, the trustee will have an option to replace the existing servicer
with a new servicer within 30 calendar days.
Since the collections from the borrowers remain with the servicer for one month, the transaction
is exposed to commingling risk. The transaction documents contain a rating trigger to mitigate
this commingling risk. As per this trigger, if the servicer‟s rating falls below „IND A1‟ or „IND A‟,
the collections from borrowers are to be deposited in the Collection and Payout Account on a
daily basis.
The transaction document also contains a second trigger, whereby if the servicer is
downgraded below „IND A2‟ and „IND BBB‟, and if requested by the investor, the servicer will
perform either of the following two actions:
Inform the obligors to make all payments due under the loan agreements to the assignee
directly
Post collateral for one month exposure to cover commingling risk
Account Bank
The originator has provided the CE to be in the form of fixed deposits with account bank (the
designated bank) in the name of the originator, with lien marked to the trustee. If the
designated bank is downgraded below „IND A‟/„IND A1‟, publicly or privately, by India Ratings,
the seller will ensure that the CE is placed with another bank whose rating is equivalent to or
higher than „IND A‟ within 30 calendar days.
Performance Analytics
India Ratings initiates surveillance only once final ratings have been assigned to a transaction.
The agency has a dedicated team of analysts who monitor and review Indian ABS transactions
rated by India Ratings. Clear and timely reporting is essential to assess the performance of a
transaction and form an accurate credit view.
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 11
India Ratings expects the report from the servicer to provide the following information with
respect to collections from the pool contracts during the previous month:
Billed amount to the borrowers
Actual collections from borrowers towards this billed amount during the month
The amount and number of contracts of prepayments/advance payments from the
borrowers
Ageing analysis of overdues
Debits from and credits to the cash collateral account and credits to the CPA
Actual payments made to the series A1 and Series A2 PTCs
Any prepayments from borrowers or foreclosures (number of contracts and amounts
obtained thereto)
Revised cash flow schedule
Contract details
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 12
Appendix A: Origination and Servicing
Originator Profile
STFCL is the flagship non-banking finance company of the Shriram group, and is one of the
largest financiers of CVs in India with more than 525 branches and few franchisees (63% of
which are in western and southern India). The Shriram group has diversified interests,
spreading across financial services industries which include consumer and commercial finance,
financial product distribution, „chit‟ funds (pooled saving schemes among individuals) and life
insurance. The group also promotes and manages several companies in industrial and
manufacturing sectors.
Over the years, STFCL has built up strong disbursement and collection skills in the „small
operator segment of the business. The small operator segment comprises non-fleet operators
who own no more than five vehicles and source their business from fleet operators. STFCL‟s
business focuses on creating knowledge of each type of asset ranging from light commercial
vehicles to heavy commercial vehicles and tippers and also building close relationships with
truckers to enhance business. The gross NPA has been in the range of 1.6%-2.3% and is less
than auto finance companies that are also auto/CV manufacturers. In the used CV segment,
STFCL has a market share of over 20%.
STFCL‟s mainstay business segment is used CVs. With a strong operating history and a limited
number of players in the market, STFCL dominates used CV financing with virtually no
competition. However, in the new vehicle financing business, it is constrained by a lot of
competition from private banks and manufacturing finance companies. In the financing
segment, customers look for a quicker turnaround; hence the opportunity cost attached for
financing companies is high but most rely on the loyalty of customers and expect repeat
business. The used CV segment of five to 15 year-old vehicles is primarily dominated by
STFCL as few financing options are available in the market. However, in the one to seven-
year-old segment, more financing options are available, making the market more competitive.
As pointed out by STFCL, customers who have financed old CVs gradually progress to finance
new CVs.
Origination
STFCL has classified the geographical regions in the following manner: north, east, west, south
and central. STFCL, based on its 30 years of experience, has demarcated regions that have
traditionally higher credit risk for each asset class, to keep defaults in check. In addition to the
branches, the company follows the franchise model where it has a profit sharing and first loss
default guarantee (FLDG) arrangement with the franchisee operator. There are around 500
franchisees spread across India. These franchisees originate on behalf of STFCL by not only
financing other asset classes, such as autos and three wheelers, but also helping STFCL to
penetrate into new customer bases.
STFCL‟s customer base comprises small road transport operators (SRTOs) who have few
supporting documents or sufficient proof of income since they operate in an unorganised
sector. In such a situation, it is imperative to maintain close relationships with customers.
STFCL‟s field executives/product executives are not only responsible for origination but also for
collections for cases referred by them. Each of the field executives/product executives
manages a specific product and handles around 150 accounts. With increasing origination
volumes, the executive count was scaled up to close to 15,000 in September 2012 from 4,952
in FY07. The field executives frequently visit the trucking clusters (which are catchment areas
for contacting truckers) and those locations where the load tendering happens.
The company‟s origination practices therefore primarily focus on the customer profile, the
territory of operation and the product it is financing.
Credit Appraisal
The company‟s credit appraisal process has two components: fixed policy and variable policy.
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 13
The fixed policy applies to all retail loan advances and the variable policy applies to each asset
class (based on the characteristics of the asset class and the expertise STFCL has built in
evaluating such asset class).
Each branch is managed by a credit executive who reports to the credit manager at the
strategic business unit (SBU) level. The product executive sources the business, collects all the
required information as per the company procedure, and forwards the credit application to the
credit executive. In case of any waivers from the prescribed credit policy, the product executive
must seek exemptions from the product manager or above. The company has a credit template
for each asset that it finances, which is suitably modified by the credit risk team regularly based
on updated information.
Credit approval is only given following an applicant‟s interview with the branch manager, and
the sanction period is normally two to three days.
Since the company concentrates on lending to SRTOs, branches are instructed to keep the
total exposure to a single operator to less than INR2.5m. The company follows the policy of not
financing over five vehicles to the same borrower at any point in time. Bulk financing of this kind
involve the decision of the SBU head. Any deviation from the norm is analysed and corrective
action is taken by the SBU head during regular visits to the branches. Each branch manages
around 1,000-1,200 agreements with a team of five to six field officers. If the number of
advances crosses the threshold, a new centre is established to cater the increased demand.
Credit Underwriting
The process starts with the product executive sourcing a loan applicant. The product executive
is an expert in one asset class and therefore has a good understanding of the application and
end-use of the product. For each used vehicle, the product executive prepares a dossier which
includes the following documents and information:
1. Insurance policy of the used vehicle
2. Travel permit of the vehicle
3. Tax challan of the vehicle
4. B-extract of the vehicle: The B-extract gives the complete details of the vehicle such as its
past owners, the date of registration and its permit, and its status on tax payments. If the
vehicle has been involved in any violation of the laws, the B-extract is withheld by the
Regional Transport Office.
5. A physical verification report of the vehicle, which includes the health of its engine,
gearbox, chassis and tyres along with a photograph
6. Viability chart, which is a projection of the cash flows that would be generated by the
applicant given the contracts he/she has with other fleet operators, the route that he/she
normally operates and the freight rates applicable for such routes
7. Valuation of the vehicle: The company maintains valuations for 700 different models.
These are updated on a quarterly basis based on new information regarding model
performance, new model launches and other business environment variables.
A physical inspection of the vehicle is carried out by a trained field officer and product
executive. The finance is primarily based on the condition of the vehicle and its model type. In
certain specific cases, a valuation report is also sought. The average LTV for the old CV
portfolio is in the range of 60-70% while for new CVs, it is around 90%. For new vehicles,
STFCL only finances the chassis and not the full body.
The details are then sent to the credit executive. The credit executive makes reference checks
on the applicant from the circle of traders he/she normally does business with and also from the
place of residence of the applicant.
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 14
The group„s policy is to provide cheaper financing to customers who have a clean track record
with the company, or those applicants who are guaranteed by an existing customer of the
company (who has a clean track record). In case the customer is new and/or the guarantor is
not an existing customer of the company, the financing is costlier or the loan advanced is lower
as a percentage of the asset value.
If the documents are found to be in order, the applicant is invited for an interview with the
branch manager. The final approval is given by the branch manager only after a face-to-face
meeting with the applicant.
The company gains comfort from the fact it has in-depth information about the region and
cluster of operation.
The loan granted by STFCL has twofold protection; one is by way of a full charge on the
vehicle of the borrower and the other is by way of a guarantee provided by existing STFCL
customers (people who have already taken a loan from STFCL) for the new borrower. In case
of default by the new borrower, STFCL also has a full charge on the guarantor‟s vehicle.
The tenor of new CV loans is generally around four to five years, while that of the old CV loans
is for around three to four years. Typically, the loan ticket size for old CVs ranges from
INR50,000 to INR500,000, whereas for new CVs, the loan ticket size ranges from INR500,000
to INR1,500,000. For the first year, the depreciation for popular models is around 20%, while
for less popular models it is approximated at 30%. For subsequent years, depreciation is
assumed to be 10% for both kinds of vehicles.
Servicing and Collection
The servicing function at STFCL is highly dependent on the close relationship with each
customer. At the time of origination, a payment schedule is furnished to the borrower. The
company sends periodic statements to customers for payment receipt confirmation. While
making site visits to the trucking clusters, the field executives make themselves aware of the
general business environment, the freight rates and the specific customers who may be facing
difficulties in sourcing business, or those whose vehicles may have broken down or been
impounded by the law enforcement authorities. The servicing at STFCL is active in that the
collections team does not always have to depend on a missed payment before they initiate
action.
Loan collection is conducted in essentially two ways: cash and cheques. The collections are
either conducted by field executives on their trips to the clusters or made when customers visit
the branch to pay their monthly instalments branch to pay their monthly instalments. The
compensation structure for the field executives is based on three components: fixed salary,
sales generated and collection performance. One field executive at STFCL is typically given the
responsibility of tracking the collections for around 150 contracts. In case the field executive is
not able to collect dues from a delinquent customer, it is the responsibility of the other officers
at the branch along with the branch manager, to make collections. In case of late payment,
STFCL charges penal interest.
STFCL repossesses vehicles only as the last resort and prefers to bring the customer to the
negotiating table. The overall strategy is to let the vehicle run with the original owner as, in
STFCL‟s view, this improves the probability of the loan getting repaid.
Investor Accounting/Custodial Account Management
The monthly reports are subject to three layers of verification within STFCL. The first layer
check is performed by the accounts team, the second layer check by the finance team and the
third layer check is performed by the internal audit function.
Data Surveillance
Surveillance at STFCL keeps track of 90+ dpd loans in the first year. This is a primary
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 15
parameter that is studied every month to understand the quality of origination and servicing of
the loans on a continual basis. STFCL also monitors its information as regards the performance
of each asset class to update the valuation for each asset class it is financing.
Information Management
STFCL developed a FoxPro-based information management system in the 1990s, wherein
information was collected at individual collection points and aggregated, with a lag. Critical data
points related to client background and history were not part of this system, which continued to
operate until 2006.
Thereafter, STFCL developed an in-house web-based ERP application called UNO that runs
on Microsoft SQL 2008 and .Net 4.0. UNO is designed, developed and managed by Shriram
Value Services and Take Solutions.
The data centre primary site is in Chennai and the secondary disaster recovery site is in
Mumbai. The data at the Chennai Data Centre is replicated to Mumbai Disaster Recovery
Centre on an online basis. The data is also replicated to the Mumbai head-office for data back-
up.
Recruitment and Training
Field officers are recruited locally and are trained for six months before they are given field
responsibility. Their performance is reviewed periodically.
Marketing and Future Strategy
The company does not actively advertise through television or other popular media. Most of the
clients are SRTOs and STFCL intends to build its clientele through a referral marketing
strategy, wherein an existing client, with a strong track record, guarantees the new client. The
product type by asset class, make and model type is well diversified.
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 16
Appendix B: Pool Characteristics
Figure 12 Seasoning (Months) Pool (%)
<3 0.0 3 to 6 18.5 6 to 12 35.9 12 to 18 34.9 18 to 24 8.9 24 and above 1.8
Source: STFCL, India Ratings
Figure 13 Original LTV Distribution
(%) Pool (%)
<=50.0 1.2 50.1 to 60.0 41.4 60.1 to 70.0 18.0 70.1 to 80.0 11.8 80.1 to 90.0 18.3 90.1 and above 9.3
Source: STFCL, India Ratings
Figure 14 Geographical Distribution State Pool (%)
Andhra Pradesh 26.1
Maharashtra 16.9 Tamilnadu 8.2 Karnataka 8.0 Gujarat 6.6 Uttar Pradesh 5.5 Chhattisgarh 4.7 Madhya Pradesh 4.6 Rajasthan 4.1 Bihar 3.8 Kerala 3.5 Others 7.9
Source: STFCL, India Ratings
Figure 15
Distribution by Original Loan Amount Amount Pool (%)
0.0 to 0.5m 25.6 0.5 to 1.0m 41.6 1.0 to 1.5m 12.4 1.5 to 2.0m 14.1 Greater than 2.0m 6.4
Source: STFCL, India Ratings
Figure 16
Distribution by Original Tenor Tenor Pool (%)
<=12 months 0.1 12-24 months 1.8 24-36 months 9.7 36-48 months 39.2 48-60 months 49.2 >60 months 0.0
Source: STFCL, India Ratings
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 17
Figure 17
Distribution by IRR IRR Pool (%)
<=10.0 0.0 10.0-12.0 1.8 12.0-14.0 46.8 14.0-16.0 42.7 16.0-17.75 8.7 >17.75 0.0
Source: STFCL, India Ratings
Figure 18 Asset Class Asset type New Used
HCV 10.9 54.5 Equipment 19.0 3.1 LCV 6.3 0.9 Passenger 1.3 1.7 SCV 0.0 2.3
Source: STFCL, India Ratings
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 18
Appendix C
Figure 19 Deal Comparison
Transaction name STFCL DA
March 2012 - 02 STFCL CV Trust
Nov 12 - II Small Operators
Trust 2013 STFCL CV Trust
Dec 12 - I
Asset class (%) New CV: 9.3;
Used CV: 21.7; New tractor:11.1;
Used tractor:54.4;
New pssgr:2.0; Used pssgr:1.5
New CV: 18.7%; Used CV: 75.5%; New Pssgr:1.2%; Used Pssgr:4.6%
New CV: 18.2%; Used CV: 75.5%; New Pssgr:3.7%; Used Pssgr:2.7%
New CV: 36.2%
Used CV: 60.8%
New Pssgr: 1.3%
Used Pssgr: 1.7%
WA original LTV (%) 64.0 62.7 65.4 68.9 WA original tenor (months)
37.3 51.9 50.2 49.9
WA seasoning (months) 4.0 14.0 12.4 11.9 Pool amortised (%) 8.7 28.5 25.6 24.4 WA IRR (%) 26.2 14.1 14.7 14.2 Loans delinquent (%) 18.0 8.9 7.8 6.4 Transaction structure Par Par Par Par CE (% POS) 12.50 10.85 10.50 10.90
pssgr: Passenger vehicle Source: India Ratings
Structured Finance
STFCL CV Trust Dec 12 - I
March 2013 19
ALL CREDIT RATINGS ASSIGNED BY INDIA RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://WWW.INDIARATINGS.CO.IN/UNDERSTANDINGCREDITRATINGS.JSP IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE WWW.INDIARATINGS.CO.IN. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. INDIA RATINGS‟ CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE.
Copyright © 2012 by Fitch, Inc., Fitch Ratings Ltd. and its subsidiaries. One State Street Plaza, NY, NY 10004.Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings, India Ratings & Research (India Ratings) relies on factual information it receives from issuers and underwriters and from other sources India Ratings believes to be credible. India Ratings conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of India Ratings factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third-party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of India Ratings‟ ratings should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information India Ratings relies on in connection with a rating will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to India Ratings and to the market in offering documents and other reports. In issuing its ratings India Ratings must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings can be affected by future events or conditions that were not anticipated at the time a rating was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind. A rating provided by India Ratings is an opinion as to the creditworthiness of a security. This opinion is based on established criteria and methodologies that India Ratings is continuously evaluating and updating. Therefore, ratings are the collective work product of India Ratings and no individual, or group of individuals, is solely responsible for a rating. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. India Ratings is not engaged in the offer or sale of any security. All India Ratings reports have shared authorship. Individuals identified in a India Ratings report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a rating by India Ratings is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of India Ratings. India Ratings does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. India Ratings receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. The assignment, publication, or dissemination of a rating by India Ratings shall not constitute a consent by India Ratings to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of The United Kingdom, or the securities laws of any particular jurisdiction including India. Due to the relative efficiency of electronic publishing and distribution, India Ratings research may be available to electronic subscribers up to three days earlier than to print subscribers.
The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings.
