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Rating Action:

Moody's assigns Baa2 (sf) to Series A PTCs issued by Platinum Trust February 2018 - Tranche II, Cholamandalam-sponsored loan against property ABS in India

07 Mar 2018

Singapore, March 07, 2018 -- Moody's Investors Service has assigned a definitive Baa2 (sf) rating to the Series A pass-through certificates (PTCs) issued by Platinum Trust February 2018 - Tranche II (the Issuer). The certificates are backed by a static pool of loans against property (LAP) originated by Cholamandalam Investment and Finance Company Limited (Cholamandalam) in India.

The complete rating action is as follows:

Issuer: Platinum Trust February 2018 - Tranche II

.... INR 3,155,909,649.88 Series A PTCs, Baa2 (sf) Assigned

The rating addresses the expected loss posed to investors by the legal final maturity. The structure allows for timely payment of interest and principal on the rated notes.

Moody's ratings address only the credit risks associated with the transaction. Other non-credit risks have not been addressed, but may have a significant impact on yield to investors.

RATINGS RATIONALE

This transaction is a securitization of a static pool of LAP loans, which are business loans, supported by business cash flows and secured by a mortgage over real estate, originated by Cholamandalam across India.

At closing, Cholamandalam assigned a pool of these secured loans, together with its security interest over the property to the Issuer. The trust will issue one series of PTCs, namely, Series A PTCs.

Under a LAP contract, a loan is extended to borrowers running micro and small manufacturing and service enterprises, secured by a mortgage over real estate, usually residential or commercial property. About 85.10% of the securitized pool (by principal balance) in this transaction is secured by mortgages over the borrower's self-occupied residential property.

The loan proceeds are usually used for business activities like working capital requirement, business expansion, and the purchase of equipment.

A large proportion of loans in the LAP portfolio were originated by Cholamandalam from 2013, reflected by the fact that the LAP portfolio grew to INR 99.9 billion as of December-2017 from about INR 43.6 billion as of March-2013. The resultant limited historical performance information may not be sufficient to fully reflect the future performance of the portfolio. In addition, there is limited performance data available for this asset class at an industry level, and the typical tenure of such loans is 10-15 years, meaning that the performance data does not reflect a full cycle. Further, between March-2013 and December-2017, the 90+ delinquencies have increased to 6.0% from 1.0%.

The rating on the PTCs will exhibit some linkage to the credit quality of Cholamandalam, because the Issuer relies heavily on Cholamandalam to continue servicing the securitized pool to meet its interest payments and scheduled principal amortization payments to PTC holders.

Cholamandalam's servicing involves the collection of loan payments from the borrowers, who are in turn located across India. Accordingly, any disruption to Cholamandalam's operations would disrupt the collection of loan payments and would negatively impact the trust's own payments to PTC-holders.

Even though the Issuer may appoint a successor servicer (following certain servicer replacement events or default events), this process of replacement could prove lengthy and costly, with potential disputes with borrowers over loan payments.

The underlying loans have a floating interest rate and are fully amortizing in nature. With any change in interest rate, the lender may either change the tenor of the loan to account for the change in interest — by keeping the instalment amount unchanged — or revise the instalment amount with the tenor remaining unchanged.

A general practice in the market among lenders is to change the tenor of the loan, rather than the instalment amount. However, lenders do generally apply a cap on the mortgage loan tenure based on the age of the borrower.

Moody's has based its analysis of the transaction on the maturity of the PTCs defined under the transaction documents. Similar to most Indian ABS transactions, the PTCs repayment schedule mirrors the asset-side repayment schedule. As floating-rate loan maturities changes, the PTC's scheduled maturity changes too. In its analysis, Moody's has considered this changing PTC scheduled maturity date as the legal final maturity.

In assigning the rating, Moody's analysis focused — among other factors — on the following:

(1) The characteristics of the securitized pool;

(2) The high borrower concentration risk of the pool, with only 721 loans and 716 unique borrowers. The effective number of borrowers is around 326.

(3) The historical performance of similar types of loans originated by the originator;

(4) The credit quality of the originator;

(5) The probability of operational disruption upon originator default;

(6) The size of liquidity facilities and credit enhancement to support timely payments on the PTCs, against the risk of defaults and arrears in the securitized pool and/or the originator;

(7) The readiness of the trustee to carry out remedial actions to minimize commingling risk and potential set-off risk following a servicer replacement or default event;

(8) The macroeconomic environment; and

(9) The legal and structural integrity of the transaction.

Moody's considered, among other things, the following transaction's key strengths:

(1) The experience of the originator in underwriting and servicing the underlying loans in India;

(2) The favorable terms of the loans, with equal monthly instalments and a 50.7% weighted average loan-to-value (LTV) ratio at loan origination;

(3) The fact that the transaction has a static pool of loans. As a result, it is only exposed to the default risk of the loans in the cut-off pool — which have a weighted average remaining tenor of about 135 months — and to the operational risk of the servicer during the life of the portfolio;

(4) The fact that the transaction benefits from two main sources of credit enhancement: (a) the 5.0% first-loss credit facility and the 7.8% second-loss credit facility at closing; and (b) excess interest collections from the pool (after payment of the interest on the PTCs in each period) can be applied to top up previously drawn credit facilities to their original target amount; and

(5) The originator's interests aligning strongly with those of the PTC-holders. In particular, according to the minimum retention requirements from the Reserve Bank of India, the originator has to retain a 10% exposure in the deal.

Moody's has also considered the transaction's following key weaknesses, which, in some cases, could lead to linkage between the rating on the PTCs and the credit quality of the originator:

(1) A back-up servicing arrangement was not set up at closing. Servicing of the transaction may be subject to disruption if the originator/servicer fails to perform when needed. A servicing disruption could negatively impact collections. Nevertheless, the risk of servicer disruption is mitigated to some extent by the fact that the collections for the underlying loans are centralized and credit facilities cover on average 12 monthly investor payouts of both scheduled principal and interest.

(2) Commingling risk with servicer's fund: The servicer will designate staff for the collection of loan payments from borrowers every month, and commingle such collections with its own funds. Therefore, this amount will be subject to commingling risk until the servicer transfers such collections to the issuer's trust account on a specified date in the following month, which is on the PTCs' monthly payment date. Moody's has considered in its analysis the credit quality of the servicer and the readiness of the trustee — or its designated agent — in notifying the borrowers that their loans were assigned to the trust and that loan payments should be paid to the trust. Moody's has also incorporated two months of cash commingling exposure in the transaction modeling.

(3) High borrower concentration: The underlying securitization portfolio has a high level of borrower concentration, with the top 10 borrowers accounting for 8.1% of the securitized pool (by principal balance) and top 20 borrowers making up 14.5% of the total. To factor-in the borrower concentration in to its analysis, Moody's used CDOROM to derive the default distribution for this transaction.

MAIN MODEL ASSUMPTIONS:

In rating this transaction, Moody's used the following models: (1) ABSROM to model the cash flows and determine the loss for each tranche; and (2) CDOROM to derive the default distribution applicable to this transaction.

Moody's ABSROM cash flow model evaluates all default scenarios occurring that are then weighted considering the probabilities of such default scenarios as defined by the transaction-specific default distribution.

In each default scenario, the corresponding loss for Series A PTCs is calculated given the incoming cash flows from the assets and the outgoing payments to third parties and PTC-holders. Consequently, the expected loss on the Series A PTCs is the sum product of: (1) the probability of occurrence of each default scenario; and (2) the loss derived from the cash flow model in each default scenario for the PTCs. As such, Moody's analysis encompasses the assessment of stressed scenarios.

Moody's used CDOROM to derive the default distribution for this transaction. Moody's CDOROM™ model is a Monte Carlo simulation which takes borrower-specific Moody's default probabilities as input. Each borrower reference entity is modelled individually with a standard multi-factor model incorporating intra- and inter-industry correlation.

Moody's has conservatively assumed a single industry for all the underlying borrowers given the lack of granular information on this parameter from the loan by loan data provided. This translates into an asset correlation assumption of 16.5% between all the borrowers in the underlying pool. In each Monte Carlo scenario, defaults are simulated.

In addition, Moody's has assumed an annual prepayment of 15% per year and a recovery rate of 60% and a recovery time of 24 months after the default occurrence. Furthermore, Moody's has considered: (1) the amortization profile and a stressed yield vector of the portfolio; and (2) the commingling risk, assuming the loss of the equivalent of two months of collections upon servicer insolvency.

CDOROM's default distribution, along with other assumptions, implies a mean loss rate of 8.34% and a coefficient of variation of 58% for the securitized pool loss distribution over a pool weighted average life of 3.25 years, factoring-in prepayments and 6.96 years, without prepayments.

These assumptions are made according to Moody's analysis of the characteristics of such pools, the portfolio's historical performance, and Moody's view on India's social and macroeconomic environment and risks, as reflected in the sovereign's long-term local currency country ceiling of A1.

RATINGS METHODOLOGY:

The principal methodology used in this rating was Moody's Global Approach to Rating SME Balance Sheet Securitizations published in August 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING:

Factors that may cause a downgrade of the rating include: (1) increased operational and liquidity risks, including a significant deterioration in the credit profile of the servicer and the absence of mitigating actions by the trustee; or (2) a deterioration of the securitized pool performance.

Factors that may cause an upgrade of the rating include: (1) reduced operational and liquidity risks, including a significant improvement in the credit profile of the servicer and an increase in the liquidity coverage of the trust over a prolonged period; and (2) an improvement in the securitized pool performance.

The performance expectations for a given variable indicate Moody's forward-looking view of the likely range of performance over the medium term. Performance that falls outside the given range may indicate that the securitized pool's credit quality is stronger or weaker than what Moody's had previously anticipated.

STRESS SCENARIOS:

Moody's also tested other sets of assumptions under its Parameter Sensitivities analysis. If the recovery rate of 60% was lowered by 25%, the model-indicated rating for Series A PTCs of Baa2 would be Ba2.

Whereas, if the default probability was increased by 10%, the model-indicated rating for a Series A PTCs would have been Baa3.

Parameter Sensitivities provide a quantitative, model-indicated calculation of the number of notches that a Moody's-rated structured finance security may vary, if certain input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged. It is not intended to measure how the rating of the security might migrate over time, but rather, how the initial rating of the security might differ as certain key parameters vary.

THE COMPANY:

Cholamandalam is a Tamil Nadu-based non-banking finance company, operating in the commercial vehicle finance segment and home equity loans. The company has a strong presence across India. At 31 December 2017, it operated 858 branches across 27 states/union territories — 853 vehicle finance branches and 139 home equity branches, with 134 constituting common branches — and assets under management totaling more than INR390 billion.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

Moody's either did not receive or take into account one or more third-party due diligence assessment(s) regarding the underlying assets or financial instruments (the "Due Diligence Assessment(s)") in this credit rating action.

The Due Diligence Assessment(s) referenced herein were prepared and produced solely by parties other than Moody's. While Moody's uses Due Diligence Assessment(s) only to the extent that Moody's believes them to be reliable for purposes of the intended use, Moody's does not independently audit or verify the information or procedures used by third-party due-diligence providers in the preparation of the Due Diligence Assessment(s) and makes no representation or warranty, express or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of the Due Diligence Assessment(s).

The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each rated instrument.

Moody's describes the stress scenarios it has considered for this rating action in the section "Ratings Rationale" of this press release.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Dipanshu Rustagi
Asst Vice President - Analyst
Structured Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Yian Ning Loh
Senior Vice President
Structured Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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