Commercial vehicle (CV) loans, based on asset backed securities, are likely to remain resilient even if there were to be a severe slowdown to the economy, according to credit ratings agency Fitch.

Fitch tested its ratings on CV loan-based asset backed securities (ABS) to stressful scenarios arising from a potential slowdown in factory output, and a hike in diesel prices.

Both factors are likely to have a direct impact on the ability of commercial vehicle owners to repay their loans.

The ratings agency said that deregulation of diesel prices will have an impact on small truck operators who would be then exposed to global market forces.

It assumes two scenarios by which the ability of CV owners to service their debt will be stressed.

The first scenario (moderate stress scenario) assumes that there is either no industrial growth or a decline of three per cent over the next 18 months. Further, it assumes that diesel prices will increase by 12-15 per cent over the same period, which does not get adjusted with a proportionate increase in freight rates.

In such a scenario, default rates will increase two-fold and recovery rates will drop by 10 per cent from Fitch’s current estimates.

“Under this scenario, 63.6 per cent of the tranches rated ‘AAA(SO)(ind)’ would continue to maintain their ratings and none would migrate to ratings below the ‘A(SO)(ind)’ category,” it said.

In the second scenario (severe stress scenario), it assumes IIP (index of industrial production) shrinking by 10 to 12 per cent and diesel prices going up by 25 per cent. In this scenario, which Fitch sees as “extremely remote”, default rates will increase by 4-5 times of current peak defaults. It also sees recoveries to be 30 per cent lower.

It further adds, “Significantly, none of the tranches would fall below ‘C(SO)(ind)’ or worse, implying that these highest rated tranches would still not face any loss.”

> satyanarayan.iyer@thehindu.co.in

Related Topics