10 December 2020 – GCR Ratings (“GCR”) has affirmed the credit ratings of the various Classes of Notes issued by Fox Street 7 (RF) Limited (“Fox Street 7” or “the Transaction” or “the Issuer”). This follows GCR’s annual review of the Transaction.
The Transaction has a Subordinated Loan of R179.6m, which is unrated.
The credit ratings accorded to the Class A Notes relate to timely payment of interest and ultimate payment of principal by their Final Redemption Date, whilst the ratings on the other Class B Notes relate to ultimate payment of interest and ultimate payment of principal by their Final Redemption Date. The ratings exclude an assessment of the ability of the Issuer to pay either any (early repayment) penalties or any default interest rate penalties.
Fox Street 7 (RF) Limited is a Residential Mortgage Backed Securities (“RMBS”) securitisation of home loans originated by Investec Bank Limited (“Investec”) to its private banking clients that issued R1.06bn of secured Notes on 29 November 2019.
The Notes amortise sequentially from issuance and, since Transaction close, Class A1 Notes to the value of R136.4m have been redeemed, with R35.4m thereof having been repaid on the most recent Payment Date of 20 November 2020. This high rate of Notes amortisation is a result of net principal repayments on the underlying mortgage loans (R96.5m since issuance), quarterly release of excess reserve funds (R12.3m since issuance) and the one-time redemption of Notes using the unutilised Pre-Funding Amount (R27.6m).
The sequential amortisation of Notes leads to incremental increases in credit enhancement available through subordination to all Classes of Notes. Even the credit enhancement available to the most subordinate Class B1 Notes is considerable – a factor of the large Subordinated Loan.
Table 1: Credit Enhancement through Subordination*
|Notes Class:||Class A1||Class A2||Class A3||Class B1|
|Credit Enhancement at Transaction Close||83.9%||51.6%||19.3%||14.5%|
|Current Credit Enhancement||94.2%||58.0%||21.7%||16.3%|
*Calculated as (Subordinated Notes + Subordinated Loan) as percentage of (Total Notes + Subordinated Loan)
Transaction performance is in line and better than expectations, with only a few technical delinquencies and zero defaults having occurred since issuance and positive excess spread being earned. No Trigger Events or Stop Purchase Events have taken place.
Excess spread (calculated as: interest and fees collected on the home loans plus bank account interest plus derivative receipts less senior costs less Notes interest paid) over the three quarters ending 31 October 2020 – the period since a portfolio of assets was acquired by the Issuer over the Pre-Funding Period, measured R15.4m, or 1.4% of the opening Notes balance as at the three-quarter period’s beginning.
Prepayments over the abovementioned three quarters amounted to R205.0m, or 18.7% of the portfolio balance as at 30 April 2020 (the end of the quarter during which 98.9% of the home loan assets of the Issuer were acquired). These were moderated by the advances (consisting of redraws, re-advances and further advances) that occurred, amounting to R142.9m (13.0% of the 30 April 2020 portfolio). Net principal repayments (prepayments plus contractual repayments less advances) amounted to R96.5m, or 8.8% of the portfolio balance as at 30 April. GCR notes that it is too early in the life of the Transaction to determine long-term trends. Additionally, prepayment and redraw behaviour over the COVID-19 period is likely to differ from the norm.
GCR considered the effect of the COVID-19 crisis on the Transaction. Data provided by Investec shows that offers of relief taken up or requested by affected borrowers as at 22 April 2020 amounted to R 390,331 in monthly instalments due (applying to approximately 3.1% of contractual instalments due). The April relief instalments consisted chiefly of full payment holidays but included a few instances where interest only was to be deferred. The relief was granted on a one- to two- month basis.
As at 31 October 2020, the amount of instalment payment relief granted or requested had reduced to zero. Nevertheless, as a conservative measure due to the ongoing nature of the COVID-19 event, GCR reduced cash receipts in its cash flow model by 3% monthly over the modelled first half-year.
GCR also accounted for COVID-induced decreases in property values by reducing the latest (July 2019) indexed property values of the Transaction’s indicative (pre-funding) asset pool by 20%. Such decrease leads directly to reduced modelled recovery rates on modelled defaulted loans:
Table 2: Modelled Recovery Rates
|Pre 20% Property Valuation Reduction||83.80%||86.92%||89.65%||90.51%||91.85%||93.22%|
Thus, modelled COVID stresses for the current review comprise decreased monthly cash inflows and reduced recovery values.
GCR views the risk of increased delinquencies and defaults in the Transaction’s asset portfolio to have heightened since the onset of the crisis, albeit to a degree that is considerably lower than the market average. However, GCR notes that the payment relief offered by Investec mitigates this risk. Additionally, modelled default rates are based on market averages, derived mainly from Original Loan to Value (“OLTV”) ratios, and are significantly higher than those historically observed for the various Fox Street transactions, whose high quality customer base and Eligibility Criteria support performance that is far superior to the aggregate of the home loan market. Therefore, GCR did not add extra stresses to modelled delinquency and default rates which have been retained from the initial rating (and which are based on the asset characteristics of the indicative pool) as they are deemed already very conservative.
The affirmation of the ratings is a direct result of the cash flow model output, where GCR’s default, recovery and cash flow modelling methodology (see GCR’s Criteria for Rating Residential Mortgage Backed Securities (“RMBS”) – November ’18) was followed, with added cash flow stresses to account for COVID-19 as described above. As such, the affirmation reflects the fact that all Classes of Notes pass with interest and principal paid in full in all AAA(ZA)(sf) rating scenarios in GCR’s cash flow model, as was the case for the initial ratings of November 2019. The increase in credit enhancement for each Class of Notes that has been gained since the initial rating as reflected in the modelled capital structure as at 20 November 2020 through the quarterly amortisation of the Class A1 Notes, along with stable and positive performance over the year, despite the positive effect thereof being moderated by the COVID stresses and the 20% stress imposed on recovery values, lead to such result.
|Primary Analyst||Yehuda Markovitz||Structured Finance Analyst|
|Johannesburg, ZA||yehudam@GCRratings.com||+27 11 784 1771|
|Committee Chair||Yohan Assous||Sector head: Structured Finance Ratings|
|Johannesburg, ZA||yohan@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for Rating Structured Finance Transactions – September ’18|
|Criteria for Rating Residential Mortgage Backed Securities (“RMBS”) – November ’18|
|Investec Bank Limited Rating Review – July ’20|
|Notes Class||Review||Rating Scale||Rating||Outlook/Watch||Date|
|Class A1(FS7A1)||Initial & Last||National||AAA(ZA)(sf)||Stable Outlook||Nov. 2019|
|Class A2 (FS7A2)||Initial & Last||National||AAA(ZA)(sf)||Stable Outlook||Nov. 2019|
|Class A3 (FS7A3)||Initial & Last||National||AAA(ZA)(sf)||Stable Outlook||Nov. 2019|
|Class B1 (FS7B1)||Initial & Last||National||AAA(ZA)(sf)||Stable Outlook||Nov. 2019|
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S GLOSSARY
|Advance||A lending term, to transfer funds from the creditor to the debtor.|
|Affirmation||See GCR Rating Scales, Symbols and Definitions.|
|Amortisation||From a liability perspective, the paying off of debt in a series of instalments over a period of time. From an asset perspective, the spreading of capital expenses for intangible assets over a specific period of time (usually over the asset’s useful life).|
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Assets||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Borrower||The party indebted or the person making repayments for its borrowings.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Contract||An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the contract.|
|Credit Enhancement||Limited protection to a transaction against losses arising from the assets. The credit enhancement can be either internal or external. Internal credit enhancement may include: Subordination; over-collateralisation; excess spread; security package; arrears reserve; reserve fund and hedging. External credit enhancement may include: Guarantees; Letters of Credit and hedging.|
|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 X days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors.|
|Delinquency||When a receivable is overdue and not paid on its payment due date.|
|Derivative||A financial instrument that offers a return based on the return of another underlying asset.|
|Eligibility Criteria||Limitations imposed on the type and quality of assets that can be sold by the Originator / Servicer into the Securitisation vehicle which ensure the transaction will track the performance of historical data analysed as closely as possible.|
|Excess Spread||The net weighted average interest rate receivable on a pool of assets being greater than the weighted average interest rate payable for the debt securities.|
|Index||An assessment of the property value, with the value being compared to similar properties in the area.|
|Instalment||Payment made to honour obligations in regards to a credit agreement in the following credited order: 1.) Satisfy the due or unpaid interest charges; 2.) Satisfy the due or unpaid fees or charges; and To reduce the amount of the principal debt.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Loan To Value||Principal balance of a loan divided by the value of the property that it funds. LTVs can be computed as the loan balance to most recent property market value, or relative to the original property market value.|
|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.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Payment Date||The date on which the payment of a coupon or dividend is made.|
|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.|
|Prepayment||Any unscheduled or early repayment of the principal of a mortgage/loan.|
|Principal Repayments||Scheduled payments and prepayments.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Private||An issuance of securities without market participation, however, with a select few investors. Placed on a private basis and not in the open market.|
|Property||Movable or immovable asset.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Recovery||The action or process of regaining possession or control of something lost. To recoup losses.|
|Redemption||The repurchase of a bond at maturity by the issuer.|
|Repayment||Payment made to honour obligations in regards to a credit agreement in the following credited order: 3.) Satisfy the due or unpaid interest charges; 4.) Satisfy the due or unpaid fees or charges; and 5.) To reduce the amount of the principal debt.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|Securitisation||A process of repackaging portfolios of cash-flow producing financial instruments into securities for sale to third parties.|
|Security||One of various instruments used in the capital market to raise funds.|
|Senior||A security that has a higher repayment priority than junior securities.|
|Spread||The interest rate that is paid in addition to the reference rate for debt securities.|
|Stock Code||A unique code allocated to a publicly listed security.|
|Stop Purchase Event||An event caused by deteriorating performance of a transaction or environmental changes that would stop the purchasing of new assets into the transaction.|
|Subordinated Loan||A loan typically given by the Issuer to the securitisation vehicle that is more junior than a junior tranche.|
|Subordination||The prioritising of the payment of interest and principal payments to tranches (senior, junior etc. Senior tranches are paid before junior tranches.|
|Timely Payment||The principal debt, interest, fees and expenses being repaid promptly in accordance with the contractual obligation.|
|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.|
|Trigger Event||An event caused by transactional performance or environmental changes that would impact a transaction.|
|Ultimate Payment||A measure of the principal debt, interest, fees and expenses being repaid over a period of time determined by recoveries.|
|Valuation||An assessment of the property value, with the value being compared to similar properties in the area.|
For a detailed glossary of terms utilised in this announcement please click here.
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, securities or financial instruments being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, securities or financial instruments.
Information received from Investec to accord the credit ratings included:
- Investor Reports to 20 November 2020
- COVID-19 Relief Data, April 2020 and October 2020