STFC benefits from high yields


Shriram Transport Finance Company

S&P Global Ratings has assigned its ‘BB+’ long-term issue rating to the US dollar-denominated senior secured notes that Shriram Transport Finance Co Ltd (STFC: BB+/Stable/B) proposes to issue.

The notes are under STFC’s US$2 billion multi-currency global medium-term note (GMTN) program. The issue rating is subject to our review of the final issuance documentation.

“We equalize the rating on the notes with the long-term issuer credit rating on STFC. The notes are direct and unconditional obligations of the company. They are secured and will rank equally, without any preference, among themselves, and with all other outstanding secured and unsubordinated obligations of the issuer,” said S&P.

The notes have performance-related covenants, which, if breached, can result in an event of default and early redemption of the notes, subject to approval from the Reserve Bank of India (RBI).

These covenants are:

STFC’s capital adequacy ratio (CAR) should comply with minimum regulatory requirements; and
The company’s net nonperforming loan (NPL) ratio, based on the RBI’s recognition norms, should at all times be equal to or less than 7.0% based on a 90-day delinquency period.

“We see limited risk of STFC breaching its covenants over the next 12 months,” said the rating agency on 15 April 2019, recognizing the company’s strong market position as the largest financier of commercial vehicles in India.

It benefits from high yields on its pre-owned commercial vehicles portfolio and low operating costs, which compensate for the high cost of wholesale borrowing and credit costs.

As of 31 Dec 2018, STFC’s net NPL ratio was 2.8%. STFC’s return on average assets of 2.0% over the past five years is higher than the banking industry average and comparable to that of some other finance companies that S&P rate in India.

“We believe, in a stress scenario, STFC has sufficient buffer through its pre-provision profits and will, if required, aggressively provide for its NPLs to ensure it does not breach covenants.”

The company’s capital base benefits from good internal capital generation and its CAR of 19.7% as of Dec. 31, 2018, is well above the regulatory requirement of 15%.

“We expect STFC to raise equity capital through investors or Tier-2 capital to ensure compliance with regulatory minimum capital requirements–if needed,” said S&P.


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