Announcements

Commissioner Street No. 4 (RF) Ltd – Ratings Upgraded

Johannesburg, 26 April 2018 — Global Credit Ratings (“GCR”) has upgraded the final, public long-term credit ratings of the below mentioned senior secured credit linked notes (“Notes”) issued by the Issuer on 10 October 2011 with a Stable Outlook.

  • Class A-4 Notes stock code MEFSA4 R250,000,000 due 5 January 2019
    AA+(ZA)(sf)
    Stable Outlook

  • Class A-4 Notes stock code MEFSB4 R65,000,000 due 5 January 2019
    AA+ (ZA)(sf)
    Stable Outlook

  • Class A-5 Notes stock code MEFSB5 R215,000,000 due 5 January 2022
    AA+ (ZA)(sf)
    Stable Outlook

  • Class A-6 Notes stock code MEFSA6 R465,716,739 due 5 July 2026
    AA+ (ZA)(sf)
    Stable Outlook

    The rating of the Notes is credit linked to the long-term Public Debt credit rating of the eThekwini Municipality (the “Borrower”). The ratings accorded to the Notes relate to timely payment of interest and principal.

    RATING RATIONALE

    The Notes were issued under the ‘Commissioner Street Collateralised Note Programme’, a notes programme administered by Absa CIB. The ‘Collateral’ relating to the Transaction are the rights, title and interest in one loan provided by Absa to the Borrower in 2011 (the “Loan”). The Issuer acquired ownership of this loan through an outright cession. The loan repays interest and principal on a bi-annually basis. The loan (R736.2m) is still outstanding with a scheduled maturity date of 30 June 2026 that pays a fixed interest rate of 10.19%, p.a. The Issuer has the excess of the debt service payments in the Interest Account (R6.5m) and Principal Account (R259.5m) at April 2018. R315m is scheduled to be repaid on 5 January 2019 that will settle the Class A-4 Notes.

    The Borrower complied with the Loan undertakings over the review period. Debt service payments on the Loans are deposited by the Borrower directly into a bank account established in the name of the Issuer, thereby mitigating potential commingling risk.

    In order to mitigate interest rate risk (the Loans pay a fixed rate, whilst the majority of the Notes pay a floating rate), the Issuer has entered into interest rate swap agreements with the Swap Counterparty.

    The ratings of the Notes are credit linked to the national scale long-term Public Debt credit rating of the Borrower. The performance of the Notes is predominantly linked to the ability of the Borrower to make payments due under the Loan.

    GCR upgraded the national scale public debt rating of eThekwini to ‘AA+(ZA)’ on 2 March 2018, while the short-term rating has been maintained at ‘A1+(ZA)’, with the Outlook accorded as Stable. GCR upgraded the rating of the Notes on the basis of the rating action taken on eThekwini Municipality, the Borrower.

    The Transaction de facto includes three risk presenting entities: eThekwini, Absa and the Permitted Investments (such investments are currently held with Absa). Through the Applicable Issuer Supplement, the Noteholders obtain credit exposure to eThekwini. Absa performs several supportive functions to the Transaction (including being Swap Counterparty to the Issuer and Account Bank).

    The Issuer and Security SPV are set up as bankruptcy remote vehicles with limited activities, and are not considered to be risk presenting entities. In order to mitigate Absa’s counterparty risk, the swap and bank account documentation includes language detailing that remedial action will be taken in the event that Absa’s long and short-term ratings are downgraded below ‘A+(ZA)’ and ‘A1(ZA)’ respectively. Moreover, upon early termination of the swaps and if the Swap Counterparty is the defaulting party, any net payment due to the Swap Counterparty will rank subordinate to any payment due to the Noteholders. In addition, Absa’s current credit rating is of sufficient credit quality not to constrain the rating of the Notes. Permitted Investments are expected to comply with GCR’s permitted investments criteria.

    No rating sensitivities were applied to the ratings due to the nature of the Transaction being credit linked to the Borrower.

    RATINGS HISTORY

    Stock code
    Stock code
    Initial Rating
    Long-term Rating
    Outlook
    Last Rating
    Long-term Rating
    Outlook
    Class A-4 Notes
    MEFSA4
    7 November 2011
    AA-(ZA)(sf)
    Stable
    30 November 2017
    AA(ZA)(sf)
    Positive
    Class A-4 Notes
    MEFSB4
    7 November 2011
    AA-(ZA)(sf)
    Stable
    30 November 2017
    AA(ZA)(sf)
    Positive
    Class A-5 Notes
    MEFSB5
    7 November 2011
    AA-(ZA)(sf)
    Stable
    30 November 2017
    AA(ZA)(sf)
    Positive
    Class A-6 Notes
    MEFSA6
    7 November 2011
    AA-(ZA)(sf)
    Stable
    30 November 2017
    AA(ZA)(sf)
    Positive

    ANALYTICAL CONTACTS

    Primary Analyst

    Corné Els

    Senior Structured Finance Analyst

    cornee@globalratings.net

    Secondary Analyst

    Tinashe Mujuru

    Structured Finance Analyst

    TinasheM@globalratings.net

    +27 11 784 1771

    Committee Chairman

    Yohan Assous

    Sector Head: Structured Finance Ratings

    yohan@globalratings.net

    +27 11 784 1771

    APPLICABLE METHODOLOGIES

    Global Master Structured Finance Rating Criteria, updated February 2017;

    Global Credit-Linked Note and Repackaging Vehicle Rating Criteria, updated May 2017;

    Global Master Criteria for Rating Public Entities, updated February 2018;

    eThekwini Municipality Rating Report – March 2018;

    Absa Financial Institutions Rating Report – April 2017.

    RATING LIMITATIONS AND DISCLAIMERS

    ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

    GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S STRUCTURED FINANCE GLOSSARY

    Account Bank A bank where the transaction account is held.
    Agreement A negotiated and usually legally enforceable understanding between two or more legally competent parties.
    Bankruptcy Court proceedings at which an individual or a company is declared unable to pay its creditors. The liability of a bankrupt company typically exceeds its assets.
    Bankruptcy Remote A feature, through real security and guarantees that reduces the enforceability of a creditor against a Special Purpose Vehicle. Typically a Security Special Purpose Vehicle should be bankruptcy remote.
    Borrower The party indebted or the person making repayments for its borrowings.
    Collateral An asset pledged as security in event of default.
    Commingling The mixing of various transaction parties’ funds in an account.
    Credit A contractual agreement in which a borrower receives something of value now, and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company
    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.
    Debt An obligation to repay a sum of money.
    Default A default occurs when: 1.) The Borrower is unable to repay its debt obligations in full; 2.) A credit-loss event such as charge-off, specific provision or distressed restructuring involving the forgiveness or postponement of obligations; 3.) The borrower is past due more than 90 days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors.
    Downgrade The assignment of a lower credit rating to a corporate, sovereign of debt instrument by a credit rating agency. Opposite of upgrade.
    Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.
    Fixed Interest An interest rate that does not change as the repo or reference rate changes.
    Interest Rate Swap A form of insurance against interest rate risk. The exchange of interest rates from floating to fixed or vice versa.
    International Scale Rating LC International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.
    Issuer The party indebted or the person making repayments for its borrowings.
    Loan A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond.
    Long-Term Rating A 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.
    Noteholder Investor of capital market securities.
    Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
    Rating Outlook A Rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).
    Security An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.
    Senior A security that has a higher repayment priority than junior securities.
    Short-Term Rating A short-term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.
    Stock Code A unique code allocated to a publicly listed security.
    Structured Finance A method of raising funds in the capital markets. A Structured Finance transaction is established to accomplish certain funding objectives whist reducing risk.
    Swap An agreement between two parties for the exchange of a series of future cash flows. The exchange of one security for another. Normally an investment bank, which provides a swap.
    Transaction A transaction that enables an Issuer to issue debt securities in the capital markets. A debt issuance programme that allows an Issuer the continued and flexible issuance of several types of securities in accordance with the programme terms and conditions.

    For a detailed glossary of terms utilised please click here.


    SALIENT FEATURES OF ACCORDED RATINGS

    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; c.) such ratings was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

    The Arranger participated in the rating process via face-to-face meetings, teleconferences and other written correspondence. Furthermore, the quality of info received was considered adequate and has been independently verified where possible.

    The rating/s above were solicited by the Issuer of the Transaction; GCR has been compensated for the provision of the ratings.

    The credit rating/s has been disclosed to the Arranger with no contestation of the ratings.

    The information received from the Arranger and other reliable third parties to accord the credit ratings included:

    • Quarterly investor reports from 5 January 2012 up to 5 April 2018.

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