OREANDA-NEWS. Fitch Ratings has assigned expected ratings to Small Business Trust 2016's two series of pass-through certificates (PTCs). The fixed-rate notes are backed by small-business loans originated by Shriram City Union Finance Company Limited (SCUF), which also acts as the servicer for the transaction. The ratings are as follows:

INR699.9m Class A1 PTCs due September 2020: 'BBB-(EXP)sf'; Outlook Stable
INR300.1m Class A2 PTCs due September 2020: '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 distribution taxes 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.

KEY RATING DRIVERS

The rating and Outlook reflect adequate external credit enhancement (CE) of 12% 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.

The pool assigned to the trust consists of micro- and small-enterprise loans. These loans are offered to customers for business needs and not to fund the underlying collateral securing these loans. The loans are sensitive to economic activity, in particular GDP growth and the Index of Industrial Production, given that the majority of such enterprises belong to the manufacturing sector.

Fitch affirmed India's Long-Term Foreign- and Local-Currency Issuer Default Ratings at 'BBB-' in December 2015. Fitch expects India's real GDP growth to pick up to 7.5% in the financial year ending 31 March 2016 (FY16) and 8.0% in FY17, from 7.3% in FY15.

The agency has factored this macroeconomic outlook into its analysis and its base-case default-rate assumptions. The default rate, default timing, prepayment rate, recovery rate and time to recovery, together with the portfolio's weighted-average yield, were stressed in Fitch's Asia-Pacific Consumer ABS cash flow model to assess the sufficiency of cash flow for timely payment at the current rating level. In addition, Fitch conducted analysis to assess the small-business nature of the underlying loans. Fitch 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. Fitch gave partial credit to weighted-average seasoning of 8.5 months of the underlying loans.

The collateral pool will be assigned to the trust at par, and as of 16 March 2016, it had an aggregate outstanding principal balance of INR1,000m and consisted of 1,462 loans. The pool was also diversified at the obligor level, with the largest obligor by outstanding loan representing 0.22% of the total pool. The securitised portfolio also had a fairly low weighted-average (WA) current loan-to-value (LTV) ratio of 39.3% at the cut-off date. The pool had a WA seasoning of 8.5 months and a WA yield of 16.8%. Loans in the securitised pool were all current as of the cut-off date.

In consideration of the short-term nature of the assets, Fitch has modified the even-loaded timing to allow for 100% of the defaults to occur.

EXPECTED RATING SENSITIVITIES

Sensitivity analysis was conducted to assess the impact on the rating of changes to the assumed base case default rate and recovery rate. The model-implied rating sensitivity analysis shows the ratings assigned to the Class A1 and A2 notes are likely to be downgraded following a simultaneous reduction in recoveries by 10% and increase in defaults by 10%.
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.

DUE DILIGENCE USAGE

No third-party due diligence was provided or reviewed in relation to this rating action.

DATA ADEQUACY

Fitch conducted a file review of 20 sample loan files focusing on the underwriting procedures conducted by SCUF compared to SCUF's credit policy at the time of underwriting. Fitch has checked the consistency and plausibility of the information and no material discrepancies were noted that would impact Fitch's rating analysis.