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Rating Action:

Moody's assigns Baa3 (sf) to Series A PTCs issued by Ramnos IFMR Capital 2017, Hinduja-sponsored Auto Loan ABS in India

27 Dec 2017

Singapore, December 27, 2017 -- Moody's Investors Service has assigned a definitive Baa3 (sf) rating to the Series A pass-through certificates (PTCs) issued by Ramnos IFMR Capital 2017 (the Issuer).

The certificates are backed by a static pool of commercial vehicle (CV) loans originated by Hinduja Leyland Finance Limited (Hinduja) in India.

This is the first auto loan asset-backed securities (ABS) sponsored by Hinduja rated by Moody's.

The complete rating action is as follows:

Issuer: Ramnos IFMR Capital 2017

.... INR1,605,888,593.78 Series A PTCs, Assigned Baa3 (sf)

The rating addresses the expected loss posed to investors by the legal final maturity. The structure allows for timely payment of interest and ultimate payment 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 yield to investors.

RATINGS RATIONALE

This transaction is a securitization of a static pool of CV loans originated by Hinduja in India.

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

The pool predominantly comprises new heavy CV loans, aggregating to about 80% of the initial pool principal, and is geographically diversified as it is spread across 17 states, with the top 3 states contributing around 42.2% of the initial pool principal.

The pool has an average loan ticket size of INR1.25 million, a weighted average loan to value of 85.6% and, on account of seasoning, average principal amortization since origination is 17.3%. All contracts in the pool are current as of the pool cut-off date.

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

Hinduja's servicing involves the collection of loan payments from the borrowers, located across India, at various branches and in-person and repayments are predominantly made in cash. Accordingly, any disruption to Hinduja's operations would significantly disrupt the collection of loan payments and, in turn, would negatively impact 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, with potential disputes with borrowers over loan payments.

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

(1) The characteristics of the securitized pool;

(2) The historical performance of similar types of loans originated by Hinduja and other originators;

(3) The credit quality of the originator;

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

(5) 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;

(6) The readiness of the trustee to carry out remedial actions to minimize commingling risk following a servicer replacement or default event;

(7) The macroeconomic environment; and

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

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

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

(2) The high granularity of the pool with 1,552 loans;

(3) The favorable terms of the loans: equal monthly instalments, and a healthy equity build-up indicated by the average principal amortization of 17.3%;

(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 life of 20 months and remaining maximum tenor of 51 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% of the first-loss credit facility (FLCF) held in the form of fixed deposits with Axis Bank Ltd (Baa3/P-3/Baa3(cr)/P-3(cr)/stable) and the 8.9% of the second-loss credit facility (SLCF) provided in the form of a bank guarantee by Axis Bank Ltd (Baa3/P-3/Baa3(cr)/P-3(cr)/stable); and (b) excess interest collections from the pool -- after payment of the interest on the notes in each period -- can be used to fund uncollected principal in the given month and to top up the previously drawn credit facility to its original target amount;

(6) The originator has a strong alignment of interest with noteholders. 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 would negatively impact collections because the transaction has over 1,500 loan contracts located 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) Commingling risk with servicer's fund: The servicer would collect 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) Limited liquidity buffer: The trust can draw money from the credit facility up to 13.9% 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, as the full amount of the credit facility may be used up rapidly to cover both interest and principal payments.

MAIN MODEL ASSUMPTIONS

Moody's has assumed a mean loss rate of 5.50% and a coefficient of variation of loss of 65% 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 expected significant increase in losses pertaining to loans requiring in-person collections in a scenario where there is disruption in servicing upon a default of Hinduja; (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.

STRESS SCENARIOS:

In rating auto loan ABS, loss rate and coefficient of variation of loss are two key inputs that determine the transaction cash flows in the cash flow model. Parameter sensitivities for this transaction have been tested in the following manner: Moody's tested nine scenarios derived from a combination of the mean loss rate and coefficient of variation of loss: mean loss rate: 5.5% (base case), 6.0% (base case + 0.5%), and 6.5% (base case + 1.0%); and coefficient of variation of loss: 65% (base case), 67.5% (base case + 2.5%), and 70% (base case + 5.0%).

The model output would become Ba1 if (1) the mean loss assumption becomes 6.0% (instead of the assumed 5.5%), while keeping the coefficient of variation of loss assumption unchanged at 65%; and would remain unchanged if (2) the mean loss assumption remains 5.5% and the coefficient of variation of loss assumption becomes 70%, (instead of the assumed 65%).

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 transaction has not aged. It is not intended to measure how the rating of the security might migrate over time, but rather, how the initial model output for the senior notes might have differed if the two parameters within a given sector that have the greatest impact were varied. Results are model outputs, which are one of many inputs considered by rating committees, which take quantitative and qualitative factors into account in determining the actual rating.

THE COMPANY

Hinduja Leyland Finance Limited is a systemically important non-deposit accepting non-banking finance company (NBFC), incorporated in 2008, and based in Chennai, Tamil Nadu. The company, part of the Hinduja group, received its NBFC license from the Reserve Bank of India in 2010 and commenced lending operations in FY2011.

The company offers various vehicle financing products, such as commercial vehicle, construction equipment, two-wheeler, three-wheeler, bus, tractor and car loans, which account for nearly 80% of the portfolio as of June 2017. The balance comprises loans against property (13%) and portfolio buyouts (8%).

At 31 March 2017, Hinduja reported Assets Under Management (AUM) of INR141 billon (including dealer advances and balances), as compared with AUM of INR100 billion at 31 March 2016.

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.

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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