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Rating Action:

Moody's assigns Baa2 (sf) to Series A PTCs issued by Sansar Trust September 2018 III, Shriram-sponsored auto loan ABS in India

11 Oct 2018

Singapore, October 11, 2018 -- Moody's Investors Service has assigned a definitive Baa2 (sf) rating to the Series A pass-through certificates (PTCs) issued by Sansar Trust September 2018 III, an ABS transaction backed by a static pool of commercial vehicle, equipment and passenger vehicle loans originated by Shriram Transport Finance Company Limited (Shriram).

The complete rating action is as follows:

Issuer: Sansar Trust September 2018 III

.... INR 4,946,054,061 Series A PTCs, Baa2 (sf) Assigned

The ratings address the expected loss posed to investors by the legal final maturity. The structure allows for timely payment of interest and repayment of principal of the rated notes by the legal maturity date.

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 yields to investors.

RATINGS RATIONALE

The rating is based on the quality of the underlying collateral and its expected performance, the strength of the capital structure, and the experience and expertise of Shriram Transport Finance Company Limited as the servicer.

This transaction is a securitization of a static pool of commercial vehicle, equipment and passenger vehicle loans originated by Shriram Transport Finance Company Limited in India. At closing, Shriram assigned a pool of mostly pre-owned vehicle loans, together with its security interest over the underlying vehicles, to the issuer. The pre-owned vehicle loans contribute 79.86% of the initial pool principal, with the remaining 20.14% of the initial pool principal contributed by new vehicle loans.

The rating on the notes will exhibit some linkage to the credit quality of Shriram. The linkage is based on the fact that the issuer, Sansar Trust September 2018 III, relies heavily on Shriram to continue servicing the securitized pool to meet its timely interest payments and principal amortization payments to noteholders.

Shriram's servicing involves the collection of loan payments — in person — from the borrowers who are located across India, with repayments predominantly made in cash. Accordingly, any disruption to Shriram's operations would significantly upset the collection of loan payments and, in turn, would affect the trust's own payments to noteholders.

Even though the issuer may appoint a successor servicer — following certain servicer replacement events or default events — this process of replacement will likely prove lengthy and costly, involving potential disputes with borrowers over loan payments.

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

(1) Characteristics of the securitized pool;

(2) Historical performance of similar types of loans originated by the originator;

(3) Credit quality of the originator;

(4) Probability of operational disruption upon originator default;

(5) Size of credit enhancement to support timely payments on the notes against the risks of defaults and arrears in the securitized pool and/or the originator;

(6) 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;

(7) Macroeconomic environment; and

(8) Legal and structural integrity of the transaction.

Moody's has considered, among other things, the following key strengths of the transactions:

(1) The long and nationwide franchise, leading market position, and experience of the originator in underwriting and servicing, particularly in the pre-owned/used commercial vehicle segment in India;

(2) The high granularity of the pool with 8,238 loans;

(3) The favorable terms of the loans, namely equal monthly instalments with a 72.6% weighted-average loan-to-value ratio at loan origination;

(4) 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 44.3 months — and to the operational risk of the servicer during the life of the portfolio;

(5) The transaction benefits from two main sources of credit enhancement: (a) the 5.0% first-loss credit facility (FLCF) and the 4.0% second-loss credit facility (SLCF) at closing; and (b) excess interest collections from the pool — after payment of the interest on the notes in each period — can be used to top up previously drawn credit facilities to their original target amount. The FLCF and SLCF are to held at banks which are rated at least Baa3 and have a replacement trigger linked to the rating for the same; and

(6) The originator has a strong alignment of interest with noteholders. According to 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 key weaknesses, some of which lead to some linkage between the rating on the notes 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 would negatively impact collections because the transaction has over 8,000 contracts in various parts of India, and there is a limited number of viable replacement servicers in India capable of covering such a geographic spread and conducting the collection of loan payments from borrowers in person and in cash, should the originator default.

(2) Limited liquidity buffer: The trust can draw money from two credit facilities up to a total of 9.0% of the initial portfolio amount when there is a shortage of funds to pay interest payments and scheduled principal amortization payments to noteholders. In a scenario where the servicer is not performing, and the trust is not able to receive any loan payments from the borrowers or the servicer for a prolonged period, this amount of initial liquidity coverage appears weak, because the full amount of the credit facilities may be used up rapidly to cover both interest and principal payments.

(3) 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, mostly in cash or cheques, 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 three business days prior to the notes' 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 its transaction modeling.

MAIN MODEL ASSUMPTIONS:

Moody's has assumed a mean loss rate of 4.75% and a coefficient of variation of loss of 60% for the securitized pool. These assumptions are made according to Moody's analysis of the characteristics of such pools, their historical performance, as well as Moody's view on India's social and macroeconomic environment and risks, as reflected in its long-term local currency country ceiling of A1.

RATINGS METHODOLOGY:

The principal methodology used in this rating was "Moody's Global Approach to Rating Auto Loan- and Lease-Backed ABS" published in October 2016. 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 lead to a rating upgrade include: (1) a significant increase in the level of credit enhancement that is sufficient to mitigate the likely significant increase in losses pertaining to loans requiring in-person collections in a scenario where there is disruption in servicing upon a default of Shriram; (2) a further reduction in the operational risk in the transactions arising from a further improvement in Moody's assessment of the credit profile of the servicer; and/or (3) an improvement in performance of the securitized pool compared to Moody's initial expectations.

Factors that may lead to a rating downgrade include: (1) an increase in the operational risk in the transactions arising from a deterioration in Moody's assessment of the credit profile of the servicer; and/or (2) a significant deterioration of the securitized pool performance beyond Moody's assumptions.

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 expected.

THE COMPANY:

Shriram Transport Finance Company Limited (Shriram) was established in India in 1979. It is a non-bank financial company (NBFC) with a primary focus on financing pre-owned commercial vehicles. Shriram has been registered as a deposit-taking NBFC with the Reserve Bank of India since September 2000.

As of 30 June 2018, Shriram had assets under management of about INR1.01 trillion — including about INR180.9 billion in loan assets securitized and assigned. As of the same date, the company had 1230 branches across India, 854 rural centers, and 24,533 employees, which included 15,356 field officers.

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 took 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 and used the Due Diligence Assessment(s) in preparing the rating. This had a neutral impact on the ratings.

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 quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows.

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

Jerome Cheng
Senior Vice President/Manager
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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