Johannesburg, 10 December 2020 – GCR Ratings (“GCR”) has reviewed the rating of Sanlam Alternative Income Fund under the new funds criteria. The rating has been affirmed at AA-(ZA)(f) with a Stable Outlook.
| Fund Name | Class | Scale | Rating Action | Rating | Outlook |
| Sanlam Alternative Income Fund | Fund Rating | National | Affirmed | AA-(ZA)(f) | Stable |
In July 2020, GCR announced that it had released new criteria for rating funds. This methodology is titled Criteria for Fund Ratings. This criterion predominantly applies to fixed income funds, including money market and other funds with portfolios that invest primarily in debt and debt like securities. Fund ratings (“f”) are not credit ratings. Therefore, they do not measure the relative ability of a fund to repay principal and/ or interest in a timely manner. Rather, fund ratings indicate an opinion regarding the fund’s ability to preserve principal value under varying market conditions that may be affected by credit risk, interest rates, liquidity, as well as other market conditions.
As a result, all fund ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the reviews under the new methodology and the fund ratings have been removed from ‘Under Criteria Observation’ and revised in line with the new methodology.
In the group ratings announcement titled ‘GCR Reviews South African Fund Ratings under new criteria’, GCR incorrectly released an upgrade on the fund’s rating. This was due to an internal analytical error. This rating announcement corrects that action.
Rating Rationale
GCR has adopted its typical four (4) major rating components (in line with the wider GCR Ratings Framework). For fund ratings, these four components are Credit Quality, Maturity & Interest Rate Risk, Management Assessment, and Liquidity. Each component, for each fund rating, will have a public positive, negative or neutral score assigned to it. The summation of the scores determines the GCR Risk Score, which is translated using the country specific column on the GCR Anchor Credit Evaluator into the final rating. It is important to note that there are no fixed weightings for the components, factors or sub-factors.
Sanlam Alternative Income Fund: AA-(ZA)(f) / Stable
Sanlam Alternative Income Fund’s (“SAIF” or “the fund”) objective is to offer a liquid, mainly dividend-yielding investment that will track the South African short-term interest rate cycle. Distributions to investors aim to exceed the average after tax yield normally received from money market funds. The fund largely invests in redeemable cumulative variable interest rate preference shares issued by banks and other financial services companies, or their preference share issuing subsidiaries, with the balance of the portfolio held in money market funds. The majority of the preference shares have credit-enhancing guarantees or put options in place resulting in a senior unsecured ranking. The issuer GCR risk scores for the preference shares without credit enhancement in place have a -3 notching applied to reflect contractual subordination in liquidation, the ability for the dividends to be delayed and the lack of a write-down or convertibility feature. At the review date, the weighted average credit quality was 15.5, with the investment portfolio dominated by exposures to banks (62.7%), financial services groups (25.8%) and money market funds (11.5%). The fund’s weighted average maturity is calculated taking into account liquidity features and notice periods. The 12-month average weighted average maturity is relatively long at c.475 days, however the duration is very low due to the fund largely investing in variable-rate instruments, therefore providing some uplift to the rating. We do not make any further adjustment for dividend risk as a result of the portfolio’s dividends being cumulative and tracking the short-term interest rate cycle. We consider the management and governance of the fund to be a neutral (best possible score) rating factor. Liquidity is appropriately managed for the behavioural and expected redemption of the fund’s investors.
Analytical Contacts
| Primary analyst | Thandolwenkosi Mkwananzi | Financial Institutions Analyst |
| Johannesburg, ZA | ThandolwenkosiM@GCRratings.com | +27 11 784 1771 |
| Committee chair | Matthew Pirnie | Group Head of Ratings |
| Johannesburg, ZA | MatthewP@GCRratings.com | +27 11 784 1771 |
Related criteria and research
| Criteria for the GCR Ratings Framework, May 2019 |
| Criteria for Fund Ratings, July 2020 |
| GCR Rating Scales, Symbols and Definitions, May 2019 |
Ratings History
Sanlam Alternative Income Fund
| Rating class | Review | Rating scale | Rating class | Outlook | Date |
| Fund rating | Initial rating | National | AA-(ZA)(f) | Stable | October 2016 |
| Fund rating | Last rating | National | AA-(ZA)(f) | Stable | December 2019 |
Glossary
| Asset | A resource with economic value that a company owns or controls with the expectation that it will provide future benefit. |
| Asset Quality | Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform. |
| Capital | The sum of money that is invested to generate proceeds. |
| Cash | Funds that can be readily spent or used to meet current obligations. |
| Credit Rating | An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories. |
| Liquid Assets | Assets, generally of a short term, that can be converted into cash. |
| Liquidity | The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. |
| Liquidity Risk | The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market. |
| Long-Term | Not current; ordinarily more than one year. |
| Long-Term Rating | Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations. |
| Maturity | The length of time between the issue of a bond or other security and the date on which it becomes payable in full. |
| Net Asset Value | The value of an entity’s assets less its liabilities. It is a reflection of the company’s underlying value and is usually quoted on a per share basis. |
| Portfolio | A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value. |
| Principal | The total amount borrowed or lent, e.g. the face value of a bond, excluding interest. |
| Risk | The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives. |
| Short-Term | Current; ordinarily less than one year. |
| Short-Term Rating | An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions. |
| Tenor | The time from the value date until the expiry date of a financial instrument. |
| Yield | Percentage return on an investment or security, usually calculated at an annual rate. |
SALIENT POINTS OF ACCORDED RATING
GCR affirms that a.) no part of the ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The rated entity participated in the rating process via telephonic management meetings and other written and telephonic correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The fund rating has been disclosed to the rated entities.
The information received from the rated entity and other reliable third parties to accord the fund rating included:
- A breakdown of the fund investment portfolio, including information on the instruments, their terms, conditions and credit quality;
- A breakdown of the fund investor portfolio, including fund flows and withdrawal terms;
- Detail on historical fund returns, fee structures, and expense ratios (where available);
- Details regarding the fund management, investment management and administration activities of the fund;
- Industry comparative data and regulatory framework.
The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
