OREANDA-NEWS. Fitch Ratings has assigned expected ratings to Small Business Trust 2015's pass-through certificates (PTC) as follows:

INR1.532bn Series A1 PTC due March 2017: 'BBB-(EXP)sf'; Outlook Stable
INR521.8m Series A2 PTC due September 2019: 'BBB-(EXP)sf'; Outlook Stable

The ratings address timely payment of interest and principal in accordance with the payout schedule in the transaction documents. The scheduled payout will be net of the distribution tax on the income distributed by the trust to the PTC holders. The final ratings are contingent upon the receipt of final documents conforming to information already received.

The transaction is a static securitisation of Indian rupee-denominated small business loans originated by Shriram City Union Finance Limited (SCUF), which is also the servicer for the transaction.

KEY RATING DRIVERS

The ratings and outlook reflect adequate external credit enhancement (CE) of 10.50% of the initial principal balance, and SCUF's sound origination practices, servicing experience and expertise in the collection and recovery of small business loans in India. The transaction is supported by a sound legal and financial structure.

The CE will comprise a first-loss credit facility (FLCF). The FLCF is expected to be in the form of a fixed deposit with a bank rated at least 'BBB-' and 'F3' by Fitch in the name of the originator with a lien marked in favour of the trustee.

The CE is deemed sufficient to cover the commingling risks of the servicer and the liquidity for the timely payment of the PTCs.

Taking the revised data from India's Central Statistical Office as the new reference, Fitch forecasts India's GDP growth to accelerate to 8.0% in the financial year ending 31 March 2016 (FY16) and 8.3% in FY17. While plenty of policy initiatives will likely have a positive effect on real GDP growth, including structural reforms and some fiscal and monetary policy loosening, it will take time for such measures to have an impact on growth. The government continues to roll out reforms that are likely to support the investment climate in the longer run. The central government's budget, presented on 15 March 2015, showed a continuation of this process and included efforts to reduce infrastructure bottlenecks.

The agency has factored this macroeconomic outlook into its analysis and its base-case default-rate assumptions. The default rate, recovery rate and time to recovery, together with the portfolio's weighted-average yield, were stressed in Fitch's Asia-Pacific ABS cash flow model to assess the sufficiency of cash flow for timely payment at the current rating level. In addition, Fitch has conducted analysis to assess the small-business nature of the underlying loans. Fitch has utilised its Portfolio Credit Model to analyse loan-level asset data, asset-specific recovery rates, and country correlation stress, and determined that the transaction's external CE is sufficient to support the loss rate at the highest stress under the model.

No interest-rate or foreign-currency risks exist in the transaction, since both the assets and the PTCs are fixed-rate and are denominated in rupees.

The collateral pool will be assigned to the trust at par, and as of 15 March 2015, it had an aggregate outstanding principal balance of INR2.05bn and consisted of 4,286 loans. The transaction was geographically concentrated in Tamil Nadu and Andhra Pradesh, which comprised 50.1% and 37.8% respectively of the pool. However, this reflects SCUF's business focus in both states, and the performance of SCUF's loans originated in such states has historically been satisfactory. The pool was also diversified at the obligor level, with the largest obligor by outstanding loan representing 0.22% of the total pool. Relative to recent Indian ABS transactions, the securitised portfolio also had a fairly low weighted-average (WA) current loan-to-value (LTV) ratio of 32.5% at closing. The pool had a WA seasoning of 8.5 months and a WA yield of 17.4%. Loans in the securitised pool were all current as of the cut-off date.

RATING SENSITIVITIES

Based on Fitch's sensitivity analysis, Fitch may consider downgrading the rating to 'BB+sf' if the base-case default rate increases by 30% or the base-case recovery rate declines by 30%. The sensitivity analysis assumes that the CE and other factors remain constant.

The rating may be upgraded if the ratings of the credit collateral bank holding the FLCF deposit are upgraded to above 'BBB-' and the portfolio performance remains sound, with adequate CE that can withstand stress at above a 'BBB-sf' rating scenario.

At closing, SCUF will assign small business loans to Small Business Trust 2015, which in turn will issue the PTCs. The PTC proceeds will be used to fund the purchase of the underlying loans.