Detailed Rationale

CRISIL Ratings has upgraded its rating on Non-convertible Debentures (NCDs) issued by SK Finance Limited (SK; rated ‘CRISIL A+/CRISIL PPMLD A+/Stable/CRISIL A1+’) to ‘CRISIL AA+ (CE)/Stable’ from 'CRISIL AA(CE)/Positive'.

The rating action is driven by the improved credit cover available to NCD holders on account of high amortisation and timely repayment. The NCD is supported by external credit enhancement amounting to Rs. 1.0 crore (60.0% of the outstanding balance of NCD after March-23 payouts).

The payouts to NCDs holders are supported by the following:

• Internal accruals of SK, which is the primary obligor
• Unconditional and irrevocable guarantee (SPV guarantee) provided by Vivriti Omega Trust 2020, a Special Purpose Vehicle (SPV) to which, on occurrence of pre-defined trigger event(s), SK will assign CV and Car loan receivables with principal cover of 1.15 times the issue size. The SPV guarantee will be invoked on occurrence of trigger event(s) and the cash flows from the assigned receivables will be utilized exclusively for making payouts to the NCDs holders.
• Additional credit enhancement of Rs 1.00 crore (60.0% of NCD Outstanding Amount) is available and will be utilized to pay the NCD holders on the first payout date post trigger

The NCDs are equally amortising on a monthly basis with scheduled maturity of 3 months after March 2023 payouts. However, entire interest and principal is promised to the investor only on final maturity date (27 months after March 2023 payouts). In case of temporary liquidity challenges from the underlying pool and non-payment of interest and/or principal to the investors before final maturity does NOT constitute a default on the NCDs.

The NCD investors have recourse to SK and post trigger event on the guarantee provided by Vivriti Omega Trust 2020. SK will assign CV and Car loan receivables to Vivriti Omega Trust 2020 with a cover of at least 1.15 times the issue size on occurrence of a trigger event. In turn, Vivriti Omega Trust 2020 will provide unconditional and irrevocable guarantee to the NCD holders. Further, credit enhancement of Rs 1.00 crore (60.0% of NCD Outstanding Amount) is available to NCD holders.

Prior to occurrence of a trigger event, SK shall fund the Designated Account to the extent of expected principal and coupon amount due on the NCDs. Debenture Trustee shall use the proceeds lying in the Designated Account to make payments to the Debenture Trustee. If SK fails to fund the Designated Account / Debenture Holder account or on occurrence of any of the other trigger events, Cover Pool assets shall stand immediately assigned to the Vivriti Omega Trust 2020 (without any further deed, notice or action from the Issuer). The Trust shall appoint the Issuer as the Servicer for the cover pool assets transferred. In addition to the cashflows from the assigned receivables, the credit enhancement available will also be fully utilized on the first payout date post trigger to pay the NCD investors.

Till March 2023 payout, i.e., 33 months post issuance, the pools assigned to the SPV, Vivriti Omega Trust 2020, satisfied the required eligibility criteria and none of the trigger events have occurred. The NCD outstanding amount is 1.67 Cr, CC outstanding is 1 Cr (60.0% of NCD Outstanding Amount).

In the absence of the above structural features, the rating of the NCDs would have been the same as the rating of the Issuer.

Analytical Approach

CRISIL Ratings has applied its criteria on rating asset-backed securities and instruments backed by guarantees for rating the NCDs. The (CE) suffix reflects the payment structure that is designed to ensure full and time-bound payment to NCDs holders.

Rating Assumptions

To ssess the base case shortfalls for the transaction, CRISIL Ratings has analysed moving portfolio delinquency and static pool information (with information on 90+ delinquencies) for new and used car, tractor and CV loan portfolio provided by SK Finance Ltd for originations in the period FY 2014 to Sep 2022 (with performance data till Mar 2023). The overall portfolio delinquency (90+ POS as a % of total POS) was 1.6% as of Mar 2023.

CRISIL Ratings has also factored in pool specific characteristics based on defined eligibility criteria and has estimated the base case shortfalls in the pool by the maturity of the transaction in the range of 9.0% to 12.0% of pool cashflows.

Based on its assessment of SK's short-term credit risk profile, the risk arising out of commingling of cash flows is minimal. CRISIL Ratings has adequately factored in the risks arising on account of counterparties.

The interest payouts to the NCDs holders is 11.25% coupon payable to the investor on a monthly basis but promised on the final maturity date. Step-up interest is 2.0% coupon which is applicable post any trigger event. CRISIL Ratings has considered interest of 13.25% for its analysis.

Key Rating Drivers & Detailed Description

Strengths:

• Total support available in the structure
  • Three layers of protection are available to the NCD holders. SK is the primary obligor. In case SK is not able to make the payments to NCD holders from internal accruals, the unconditional and irrevocable guarantee provided by Vivriti Omega Trust 2020 can be used. Further, additional credit enhancement of Rs 1.00 crore (60.0% of NCD Outstanding Amount) is available and will be utilized to pay the NCD holders on the first payout date post trigger
• Availability of sufficient time frame for recovery from cover pool
  • The scheduled maturity of the NCDs is 3 months after the March 2023 payouts with legal final maturity of 27 months after March 2023 payouts. There is minimum tail period of 24 months in case of any trigger event to recover from the cover pool. Also, only the receivables that fall due at least one month prior to the final maturity date of the debentures are to be included in cover calculation

Weakness:

• Geographical concentration
  • As per eligibility criteria, the maximum concentration allowed from any state is 50% of the pool size
• Potential effect of macro-economic headwinds
  • The cover pool to be assigned post trigger event will have contracts from car and CV loan receivables. Borrower cash flows could be adversely impacted by several exigencies such as increase in fuel costs, moderation in demand on account of inflation and increasing interest rate scenario amid geo-political uncertainties

These aspects have been factored by CRISIL in its rating analysis.

Rating Sensitivity factors

Upgraded factors:

• Performance of the assigned pool of receivables
  • Substantially better than expected performance of the underlying contracts in the pool resulting in collateral cover exceeding 2.5 times the estimated base shortfalls of the assigned CV and Car loan receivables

Downward factors:

• Total external support available to the NCD holders falling below 2.0 times the estimated base case loss of the CV and Car receivables of Vivriti Omega Trust 2020
• A sharp downgrade in the rating of the servicer/originator
• Non-adherence to the key transaction terms envisaged at the time of the rating

List of covenants

Key eligibility criteria for pool: -

Key trigger events for transfer of pool to SPV

Accelerated Redemption Event

Post occurrence of a Trigger Event, in case receivables are not deposited in C&P Account within the timelines agreed for deposit under payment mechanism for four consecutive instalments for any reason whatsoever and the minimum security cover falls below 1x, it will be automatically considered as Accelerated Redemption Event (without any action from Debenture Trustee or Trustee). As a consequence, all the dues (including principal and interest outstanding) shall be payable within 30 calendar days from the date of such event

Counterparty Details

Annexure - Details of Instrument(s)

* Step-up interest of 2.0% post trigger

^ After March 2023 payouts

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This rating rationale is transmitted to you for the sole purpose of dissemination through your newspaper/magazine/agency. The rating rationale may be used by you in full or in part without changing the meaning or context thereof but with due credit to CRISIL Ratings. However, CRISIL Ratings alone has the sole right of distribution (whether directly or indirectly) of its rationales for consideration or otherwise through any media including websites and portals.

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