SHRIRAM FINANCE LIMITED
Fitch Ratings has affirmed the 'BBB-sf' rating on the pass-through certificates (PTCs) from
The Outlook is Stable.
The transaction is a securitisation of Indian auto loans originated by
RATING ACTIONS
Entity / Debt
Rating
Prior
Series A
LT
BBB-sf
Affirmed
BBB-sf
Page
of 1
VIEW ADDITIONAL RATING DETAILS
KEY RATING DRIVERS
Higher Credit Enhancement (CE) to Mitigate Macroeconomic Risk: The affirmation is based on Fitch's view that the transaction has adequate protection against our expectation of slowing economic growth amid rising inflation and tighter monetary policy and the risk of a moderate rise in fuel prices. This is because the CE in the transaction has increased since closing. We expect the economy to grow by 7% in the financial year to
Nevertheless,
Fuel Price Risk Remains: Most of the loans in the transaction are to operators of commercial vehicles, whose operating costs will rise as fuel prices and other material prices climb. The ultimate impact on operators will depend on their ability to pass the higher costs to customers. The increase in the diesel price has been moderate as the excise tax cut cushioned part of the increase in the base price. International oil prices have eased since they peaked in late May, though part of the decline was offset by a weaker rupee.
We expect commercial-vehicle operators to be able to pass on a significant part of the increase in their costs to customers, as the economic recovery from the pandemic continues. The risk of rising fuel prices persists as the factors driving oil prices remain volatile.
Moderate Obligor Default Risk: The transaction has performed worse than our initial base case default expectation, but we expect the proportion of loans 90+ days past due (dpd) to stabilise soon as the 30+ dpd rate has been steady. The figures below are as of the
The PTCs have amortised by 29.7%, with CE increasing to 14.2% of the outstanding PTC balance from 10% at closing. Our base-case assumption of the default rate is revised to 5.2% from 4.0% at closing.
Experienced Servicer Reduces Operational Risk: SFL is the market leader in the used-vehicle segment and has stable origination practices, servicing experience and expertise in the collection and recovery of auto loans. SFL is a frequent issuer and servicer of auto-loans asset-based transactions in
PTC Ratings Capped on Counterparty Risk: The rating on the notes is capped at the current level as the credit collateral banks holding the first-loss or second-loss credit facility and guarantee providers must be rated at least 'BBB-' by Fitch.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Unanticipated increases in defaults or decreases in recovery rates could produce larger losses than the base case and could result in potential rating action on the notes.
Sensitivity to an increase in defaults:
10% increase in defaults: BB+sf
25% increase in defaults: BBsf
50% increase in defaults: BB-sf
Sensitivity to a decrease in recoveries:
10% decrease in recoveries: BB+sf
25% decrease in recoveries: BB+sf
50% decrease in recoveries: BB-sf
Sensitivity to a simultaneous increase in defaults and decrease in recoveries:
10% increase in defaults, 10% decrease in recoveries: BB+sf
25% increase in defaults, 25% decrease in recoveries: BB-sf
50% increase in defaults, 50% decrease in recoveries: Bsf
The sensitivity analysis assumes CE and other factors remain constant.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The transaction is at the highest achievable rating, which is capped by the rating triggers for the credit collateral banks and guarantee providers. Therefore, the notes are unlikely to be upgraded.
Best/Worst Case Rating Scenario
International scale credit ratings of Structured Finance transactions have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of seven notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of seven notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAAsf' to 'Dsf'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
USE OF THIRD PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G -10
Form ABS Due Diligence-15E was not provided to, or reviewed by, Fitch in relation to this rating action.
DATA ADEQUACY
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pool and the transaction. Fitch has not reviewed the results of any third-party assessment of the asset portfolio information or conducted a review of origination files as part of its ongoing monitoring.
Prior to the transaction closing, Fitch reviewed the results of a third-party assessment conducted on the asset portfolio information and concluded that there were no findings that affected the rating analysis.
Prior to the transaction closing, Fitch conducted a review of a small targeted sample of the originator's origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio.
Overall, and together with any assumptions referred to above, Fitch's assessment of the information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
The issuer has informed Fitch that not all relevant underlying information used in the analysis of the rated notes is public.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
Additional information is available on www.fitchratings.com
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