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Shriram Transport Finance Co. Ltd.’s INR3.2 Billion Masala Bond Drawdown Rated ‘BB+’

          SINGAPORE (S&P Global Ratings) March 6, 2018--S&P Global Ratings said today that it had assigned its 'BB+' long-term issue rating to the Indian rupee (INR) 3.2 billion senior secured bonds of Shriram Transport Finance Co. Ltd. (STFC: BB+/Stable/B). This is a rupee-denominated offshore bond (commonly known as Masala bond) drawdown from the INR50 billion medium-term notes (MTN) program by STFC. 
          We equalize the rating on the notes with the long-term issuer credit rating on the company. The notes are direct and unconditional obligations of STFC. They are secured and will rank equally, without any preference, among themselves, and with all other outstanding secured and unsubordinated obligations of the issuer.
          The notes have performance-related covenants, which, if breached, can result in an event of default and early redemption of the bonds, 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 (i) 4.0% based on a 120-day delinquency period from the issue date to March 31, 2018; and (ii) 7.0% based on a 90-day delinquency period from April 1, 2018, until the maturity date of the notes.

          We believe the risk of STFC breaching these triggers over the next 12 months is limited. The company has a 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 Dec. 31, 2017, STFC's net NPL ratio based on a 120-day delinquency period was 2.5%. STFC's return on average assets of 2.3% in the past five years is higher than the banking industry average and comparable to that of some other finance companies that we rate in India. 
          In a stress scenario, we believe the company has sufficient buffer through its preprovision profits and will, if required, aggressively provide for its NPLs to ensure it does not breach the covenant. STFC's capital base benefits from good internal capital generation and the company's CAR was 16.2% as of Dec. 31, 2017, above the regulatory requirement of 15%. If required, we expect the company to raise equity capital through investors or Tier-2 capital to ensure compliance with regulatory minimum capital requirements.