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April 15 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has affirmed three pass-through certificates (PTCs) from two Indian asset-backed securitisation (ABS) transactions, namely Small Business Trust 2012 (SBT 2012) and Small Business Trust 2013 (SBT 2013), at ‘BBB-sf’. These transactions are backed by small business loans originated by Shriram City Union Finance Limited (SCUF), which also acts as a servicer for the transactions.
The rating actions are listed at the end of this rating action commentary.
The affirmations reflect satisfactory asset performance and sufficient credit enhancement (CE) for the rated notes. For both transactions, CE has increased since the closing date, driven by steady amortisation of the static portfolios.
Loan seasoning has increased to 35 months and 20 months for SBT 2012 and SBT 2013 respectively. Other portfolio characteristics including the weighted average yield and geographical distribution have remained fairly stable since the transactions closed. Maximum loans accounted for less than 0.2% of each securitised portfolio in February 2014, reflecting minimal concentration at the obligor level.
Driven by high origination standards, delinquency levels for both transactions are zero and are deemed low relative to other rated securitisation transactions in India, particularly those that have securitised commercial-vehicle loans. The key difference is that loans securitised in SBT 2012 and SBT 2013 are used primarily to finance working-capital requirements of relatively low-risk small and medium enterprise (SME) borrowers who have a satisfactory payment record within Shriram Group. SCUF has access to detailed obligor-specific information, and it is able to tailor collateral levels to match individual risk profiles, with higher-risk customers posting greater amounts of collateral. SCUF also does not outsource its collection, but employs its own in-house teams to enhance collection efficiency.
The portfolio of SBT 2012 has amortised by 84.9% of its initial balance. This has raised the CE to 51.2% of the balance of the outstanding collateral balance in March 2014, from 7.8% in January 2012 when the transaction closed. Loans that were 90+ days past due (dpd) and 180+dpd as percentages of the initial pool balance were at zero in February 2014. Since collateral value has remained largely unchanged while loans continue to amortise, the weighted average current loan-to-value (LTV) ratio has declined to 29.3%, from 85.5% at closing. Nearly 90% of the portfolio has an LTV of below 50%, suggesting sufficient security at the loan level.
The portfolio of SBT 2013 has amortised by 65.7% of its initial balance. This has raised the CE to 38.8% of the outstanding collateral balance in March 2014, from 13.3% in April 2013 when the transaction closed. Loans that were 90+dpd and 180+dpd as percentages of the initial pool balance were at zero in February 2014. Like SBT 2012, the SBT 2013 transaction has seen its weighted average current LTV drop to 42.2%, from 82.1% when the transaction closed.
For both transactions, the CE has not been utilised. The excess spread has been sufficient to absorb losses incurred by the transactions. CE is in the form of fixed deposits, which comprise a first-loss credit facility and a second-loss credit facility, kept at Canara Bank (BBB-/Stable/F3).
In 2014, delinquencies are generally expected to increase for rated asset-backed securitisation (ABS) transactions in India. This is due to India’s economic slowdown, which is exacerbated by the recent depreciation of the Indian rupee, rising petroleum prices, and political uncertainty amid ongoing national elections. However, the impact from such stress on these two transactions is likely to be limited compared to other rated transactions given the higher quality of obligors and the different financing purpose served by the securitised loans in SBT 2012 and SBT 2013. In addition, the notes can withstand stresses well above base-case levels, and CE is likely to build up rapidly due to the fast amortisation of the underlying portfolios. Together, they should create sufficient buffers for the transactions against India’s economic uncertainties.
Based on Fitch’s sensitivity analysis, the base-case default rate would need to increase by at least 4.0x and 4.2x for SBT 2012 and 2013 respectively from the closing base-case default rates, before a downgrade of the PTCs to ‘BB+sf’ is considered. The rating-sensitivity analysis assumes that the CE and other factors remain constant. Stresses on recovery rates in the sensitivity analysis did not lead to a downgrade scenario.
The rating could be upgraded if the rating of the bank holding the cash collateral is upgraded to above ‘BBB-’ and the portfolio performance remains sound, with adequate CE that can withstand stress at above a ‘BBB-sf’ rating scenario.
Initial key rating drivers and rating sensitivities for Small Business Trust 2012 are described further in the new issue report dated 2 March 2012. A comparison of the transactions’ representations, warranties and enforcement mechanisms (RW&Es) to those of typical RW&Es for this asset class is available by accessing the reports and links given under Related Research below.
The full list of rating actions is as follows:
Small Business Trust 2012
INR831.3m Series A PTCs due September 2016 affirmed at ‘BBB-sf’; Outlook Stable Small Business Trust 2013
INR494.1m Series A2 PTCs due March 2015 affirmed at ‘BBB-sf’; Outlook Stable
INR206.8m Series A3 PTCs due June 2017 affirmed at ‘BBB-sf’; Outlook Stable Series A1 PTCs was paid in full as of 24 March 2014