CRISILs analytical framework for evaluating Securitisation Transactions

CRISILLimited

I. Securitisation - Concept
Packaging and conversion of illiquid assets and cash flows into tradable securities

CRISILLimited

Typical transaction structure

Borrowers
Scheduled payments Deposit of collections Loan

Trust and Retention Account

Servicing Sale/Assignment agent of pool receivables

Originator/ seller

SPV Trust
Consideration

PTCs

Investors
Consideration

Trustee

Borrower to Investor flow of money

Credit Trustee & designated bank

Borrower

Seller/Ser vicing agent

Servicing & commingling

Trust and retention account

Investor

Credit Enhancement

Legal risk, market risks

CRISILs analytical framework

Originator Asset Portfolio

True Sale Bankruptcy remoteness

Pool
Macro economic Prepayment Interest Rate Servicer Commingling Swap counterparty Miscellaneous

Originator risk assessment

Origination Systems

Management Information Systems (MIS)

Credit Appraisal and underwriting

Risk Control Mechanism

Disbursement and post disbursal documentation

Collection and recovery mechanism

Asset risk continuum matrix

CRISILs risk continuum matrix form a critical part of the analysis

Around 90% of PTC issuances are backed by these assets

The relative position of the asset class on the matrix is factored into base case loss levels

Portfolio Analysis

CRISIL analyses the portfolio in terms of the originators Length of experience Book Size Collection performance trends Portfolio aging analysis Delinquencies Prepayment trends

Pool level due diligence

Pool selection criteria Maximum LTV Minimum seasoning Restriction on overdue contracts Geographical diversity Checked for logical and mathematical inconsistencies Borrower concentration and profile controlled Negative deviation from portfolio profile penalised Pool information verified through independent auditor in 100% of cases

Macro-economic risks

The performance of underlying loan contracts also depends on macro-economic factors like Industry downturns Adverse price movements of underlying assets

CRISIL stresses the pool for such macro-economic factors

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CRISILs analysis of prepayment risk

Prepayments are reality in retail asset business. The prepayments are passed on to the investors, exposing the transaction to following risks:
Risk description Assessment mechanism Mitigation Technique

Reinvestment risk due to reduction of average maturity of the instrument Prepayment loss due to difference in principal of the investor and pool

CRISIL analyses the portfolio and static pools for monthly prepayment rates

Separate class of PTCs carved out to absorb all prepayments Credit enhancement is sized to take care of prepayment losses 11

Interest rate risk

Risk description Basis risk arises in the securitisation transactions when the assets are paying interest on fixed rate and the liabilities are to be paid out on floating rates or vice-versa
Assessment mechanism
CRISIL subjects pools to varying assumptions on patterns of interest rates over the tenor of the transaction Patterns determined through discussions with in-house economic research arm Simulation techniques determine the worst-case scenario

Mitigation Technique
CRISIL stipulates an interest rate swap provided by a designated swap provider.

Alternatively, CRISIL sizes credit enhancement to factor in this risk

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Legal due diligence processes

Transaction specific legal opinion obtained from eminent legal counsels (on EVERY transaction) In addition, dedicated in-house legal team to analyse legal issues Legal opinion addresses the following key legal issues:

Assignment of receivables is valid

Transfer of receivables to the trust constitutes a true sale Cash collateral is bankruptcy remote from originator Documentation has been executed in accordance with stamp duty and registration laws Transaction specific issues

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Servicing agent criteria

Typically, in India, the seller performs the servicing function on an ongoing basis and no back-up servicer is appointed
The servicer risk can arise in case of the primary servicer going bankrupt or the trustee replacing the primary servicer due to poor performance No track record of alternate servicer in India To mitigate and reduce servicing risk, CRISIL has introduced tenor based filters

CRISILs alternate servicer criteria states that no back-up servicer is required if the tenure of the transaction is as follows: Servicers credit rating AAA AA category A category Maximum tenure of the transaction up to which no back-up servicer is required Any tenure 15 years 10 years

BBB category

5 years

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Commingling criteria

This risk arises on account of the time lag between pool collections and investor payouts, during which the servicer continues to hold the pool collections. In this interim period, collections from the securitised loans may mingle with other funds of the servicer.
Assessment mechanism Mitigation Technique

The quantum of funds commingled is estimated, considering the time period for which the funds are retained by the originator before passing on to the investors

CRISILs criteria states that the servicer should have a minimum short-term credit rating of P1 However, if the rating is below P1, the quantum of credit enhancement is adjusted so as to adequately cover the risk

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Swap counterparty criteria

The swap is incorporated in the structure to mitigate the basis risk. However, The counterparty risk arises with regard to the creditworthiness of the swap provider.
CRISIL mitigates the swap counterparty risk through the following criteria:

For swap having maturity of up to 1 year SWAP counterparty should have a rating of P1+ For swap having maturity of more than one year but up to 5 years, SWAP counterparty should have a minimum rating of AA- For swap having maturity of over 5 years SWAP counterparty should have a rating of AAA

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CRISILs criteria on miscellaneous counterparties

Cash collateral bank risk: arises with regard to the liquidity of the instrument and creditworthiness of the designated bank.
CRISIL mitigates this risk through the following criteria: For a AAA(so)' rating, CC should be permitted to be invested in instrument with maturity over a year provided the entity is rated at least P1+ and AA- instrument with maturity up to a year provided the entity is rated at least P1+ provided Invested instrument can be put at par at any time Upon the downgrade of the invested instrument, it should be liquidated and reinvested in permissible instruments within 30 days 17

CRISILs surveillance process and performance of CRISIL rated securitised pool

CRISILLimited

CRISILs surveillance processes

CRISIL presently reviews 87 ABS and 22 MBS pools
Specialized surveillance team of three analysts Servicer report received from servicer or trustee every month Performance analysis of all pools undertaken every month

Discussion with originators on trends emerging out of the performance analysis

Detailed review of the transaction in case of deviations from CRISILs estimates

Reset of credit enhancement based on pools performance

Quarterly pool performance metrics published and disseminated by CRISIL 19

Performance of CRISIL rated pools

No downgrade till date

No default till date Strong and stable performance of pools Low utilisation of credit enhancement

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MBS pool performance

On an on-going basis, an MBS transaction faces three key risks

CRISIL has devised three indicators which summarise a pools performance

Credit Risk Interest rate risk Prepayment risk

Threshold collection ratio Threshold interest rate Threshold prepayment rate

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MBS pool performance.. continued

Threshold collection ratio (TCR): TCR represents the minimum collection ratio (monthly collections/monthly billings) required to be able to service the PTC payouts.
Credit coverage: Ratio of maximum sustainable credit loss in a transaction (1-TCR) to the present credit loss in the pool

TCR distribution (No. of pools)

8 4
0-75% 75%-85% 85%-90%

Credit loss coverage distribution (no. of pools)

3
3-5 5-10

10-20

20-50

>50

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MBS pool performance.. continued

Threshold interest rate (TIR): TIR represents the minimum level that the pool yield can go down to and still be able to service the PTC payouts on time

Threshold Interest rate distribution (No. of pools)

3 2

12
0-3% 3%-4% 4%-6%

Threshold prepayment rate (TPR): TPR represents the effective level of premium coverage provided by the credit enhancement

Prepayment risks are mainly relevant in premium structures where the prepayments lead to an erosion of credit enhancement. All the CRISIL rated pools have a TPR ratio of more than 100 per cent

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Credit Enhancement Utilisation in ABS pools

CRISIL has analysed credit enhancement utilisation in 54 pools which have seasoned for more than 12 months post securitisation
Max credit enhancement utlisation (no of pools) 2 6
Average Credit Enhancement Utilisation (no. of pools) 2 4 11

29 5 4
<30% 30%-35% 35%-40% 40%-45% 45%-50% >50%

31 7
<25% 25%-30% 30%-35% 35%-40% >40%

Majority of the pools are showing <30 per cent peak utilisation of credit enhancement Average utilisation of credit enhancements are low as well for all the pools 24

ABS pool performance

As part of surveillance activity, CRISIL further studies two indicators Threshold credit loss (TCL) and credit coverage ratio (CREDCOV) on an on-going basis Threshold Coverage Ratio (No. of pools)
Threshold credit loss (TCL = 1 threshold collection ratio ) represents credit loss threshold of the transaction beyond which the investors could face a shortfall in their payouts Credit coverage ratio (CREDCOV): Ratio of maximum sustainable credit loss in a transaction (1-TCR) to the present credit loss in the pool
16 19

20 30
<50% 50%-80% 80%-90% 90%-95%

CREDCOV (No of pools) 0 5 33 26

<3

3-5

20 5-10 10-20

>20

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