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Muthoot Microfin Ltd Detailed Rationale CRISIL Ratings has assigned its ‘Provisional CRISIL AA+...

Posted: 05 Jan 2025

Muthoot Microfin Ltd Detailed Rationale CRISIL Ratings has assigned its ‘Provisional CRISIL AA+ (SO)’ rating to Series A1 pass-through certificates (PTCs), issued by ‘Mikkel Trust 12 2024’ under a securitisation transaction originated by Muthoot Microfin Limited (MML; rated ‘CRISIL A+/Stable’) backed by a pool of microfinance loan receivables. The ratings are based on credit quality of the pool backing the transaction, the origination and servicing capabilities of MML, credit support available to the PTCs, payment mechanism for the transaction, and soundness of the transaction’s legal structure. The transaction has a ‘Par with Excess Interest Spread (EIS)’ structure. Series A1 PTC holders are promised timely interest on a monthly basis and principal on ultimate basis on the maturity date of the PTCs. Investor payouts for PTCs are supported by cash collateral, overcollateralisation and subordination of excess interest spread (EIS). MML will continue to service loan contracts in the pool as the servicing agent. CRISIL Ratings has estimated base case shortfalls in the pool at 7.0%-9.0% of cash flows. Additionally, potential stresses on account of economic, political and geographical concentration related factors have been applied to arrive at the adjusted base shortfalls for the pool. These adjusted shortfalls are further stressed to arrive at the rating of PTCs. The total credit enhancement available in the transaction (internal – in the form of overcollateralization and EIS; and external – in the form of cash collateral) provide loss absorption against stressed shortfalls in the pool, commensurate with the rating assigned to the PTCs. Total credit support available in the transaction structure is as below: Internal credit enhancement from scheduled cashflow subordination (assuming zero prepayments) amounting to Rs 21.53 crore (27.3% of pool principal) which includes Rs 10.65 crore of principal overcollateralization (13.50% of pool principal) and Rs 10.88 crore of excess interest spread (13.8% of pool principal) provide credit support to Series A1 PTCs. External cash collateral in the structure amounting to Rs 5.52 crore (7.0% of initial pool principal) in the form of Fixed Deposit. Key Rating Drivers & Detailed Description Strengths: Credit support available in the structure ? External cash collateral in the structure amounting to Rs 5.52 crore (7.0% of pool principal) and internal credit enhancement from scheduled cashflow subordination (assuming zero prepayments) amounting to Rs 21.53 crore (27.3% of pool principal) which includes Rs 10.65 crore of principal overcollateralization (13.50% of pool principal) and Rs 10.88 crore of excess interest spread (13.8% of pool principal) provide credit support to Series A1 PTCs. Repayment track record contracts in the pool ? The pool has a weighted average seasoning of 7.3 instalments for monthly repayment contracts and 34.0 instalments for weekly repayment transactions and pre-securitisation amortisation of ~25.9%. ? All the 18,434 contracts in the underlying loan pool are current as of the cut-off date (December 06, 2024). Structure of the transaction ? The legal structure envisaged for the transaction entails bankruptcy remoteness of the receivables and credit enhancement from the originator, and adherence to prevailing regulations on securitisations. ? These shall be certified through an independent legal opinion from an external legal counsel. Weakness: Vulnerability to socio-political risks ? The microfinance industry remains susceptible to risks arising out of socio-political issues and policy / regulatory changes. Such events can disrupt loan repayments of underlying borrowers. ? Pool collections have seen weakening in recent months primarily due to industry wide challenges such as high attrition, over-leveraging of borrowers and regional socio-political issues. However, the total support available to PTC holders through internal and external credit enhancement is commensurate with the rating of the instrument. Originators continue to adapt to evolving market dynamics, CRISIL will continue to monitor the developments in microfinance industry. These aspects have been adequately factored in its rating analysis by CRISIL Ratings. Liquidity: Strong Liquidity is strong given that the credit enhancement available in the structure is sufficient to cover losses exceeding 1.5 times the currently estimated base shortfalls Rating Sensitivity factors Upward factors Credit enhancement available in the structure exceeding 3.0 times the estimated adjusted base shortfalls on the residual cash flows of the pool. Downward factors Credit enhancement falling below 2.3 times the estimated adjusted base shortfalls A downgrade in the rating of the servicer/originator. Non-adherence to the key transaction terms envisaged at the time of the rating. About the Pool The transaction is backed by microfinance receivables originated by MML. The key pool characteristics are outlined below: The contracts in the pool have weighted average seasoning of 7.3 instalments for monthly repayment contracts and 34.0 instalments for weekly repayment transactions, which has led to principal amortisation of 25.9% as of the pool cut-off date. The pool is diversified in terms of geography with the top 3 state and top 3 districts accounting for 60.6% and 11.8% of the pool principal respectively. The average ticket size for contracts in the pool is Rs 57,718, with a weighted average interest rate of 24.1%. All the contracts in the underlying loan pool were current as of the cut-off date (December 06, 2024).