Announcements Indicative Rating Actions Rating Alerts Structured Finance

Fox Street 7 (RF) Limited – Indicative Credit Ratings Assigned

Rating Action

29 October 2019 – GCR Ratings (“GCR”) has assigned indicative national scale long term issue credit ratings to the following Classes of Notes to be issued by Fox Street 7 (RF) Limited (“Fox Street 7” or “the Issuer”) in November 2019.

Security Class Stock Code Amount Rating Class Rating Scale Rating Outlook / Watch Rating Expiry
Class A1 TBA R200,000,000 Issue Long Term National AAA(ZA)(sf)(IR) Stable Outlook 29 Nov 2019
Class A2 TBA R400,000,000 Issue Long Term National AAA(ZA)(sf)(IR) Stable Outlook 29 Nov 2019
Class A3 TBA R400,000,000 Issue Long Term National AAA(ZA)(sf)(IR) Stable Outlook 29 Nov 2019
Class B1 TBA R60,000,000 Issue Long Term National AAA(ZA)(sf)(IR) Stable Outlook 29 Nov 2019

GCR modelled the Transaction as having a Subordinated Loan of R180.1m, which is unrated. The final quantum of the Subordinated Loan will be determined several days prior to issuance.

Please note that GCR has not yet received a Pool Audit report. Should the report comprise significant findings, the final ratings to be assigned to the notes may differ from the abovementioned indicative ratings, ceteris paribus.

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 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.

Rating Rationale

Fox Street 7 (RF) Limited is a Rating Residential Mortgage Backed Securities (“RMBS”) securitisation of home loans originated by Investec Bank Limited (“Investec”) to its private banking clients that is planning to issue an initial R1.06bn of secured Notes in November 2019. Investec has previously executed six other similar Fox Street RMBS transactions.

The Issuer may use the proceeds of the issuance (a) to repay a warehousing facility that may be used to purchase a portfolio of home loans and Related Security (the “Participating Assets”) from Investec and from other Approved Sellers – including Fox Street 1 (RF) Limited and Fox Street 2 (RF) Limited, existing Investec RMBS vehicles, or (b) to purchase such portfolio directly from the Sellers; and/or to fund applicable Transaction Reserves.

GCR modelled the Transaction’s cash flows according to its proposed capital structure and priorities of payments, applying its Criteria for Rating Structured Finance Transactions, September 2018 and Criteria for Rating Residential Mortgage Backed Securities, November 2018. Fox Street 7’s asset portfolio was modelled based on the indicative (July 2019) pool provided to GCR, with defaults, recoveries, prepayments and arrears modelled according to GCR’s standard RMBS methodology and assumptions. The indicative rating outcome is a direct result of the modelling of the Transaction’s cash flows in specific rating scenarios and is detailed further in the Rating Analysis section of the Fox Street 7 (RF) Limited Indicative Rating Report published by GCR in conjunction with this Rating Announcement.

Transaction Strengths

• The Transaction begins amortising from its inception, which implies a static asset portfolio (barring further advances) and potentially an incremental build-up of additional credit enhancement as the notes amortise.

• The underlying portfolio of assets is of very high credit quality and historically has yielded few defaults and high recoveries. Approximately 47% of the assets have been held in Fox Street 1 (RF) Limited and Fox Street 2 (RF) Limited, previous Investec RMBS vehicles, and are well-seasoned.

• The Principal Deficiency Ledger mechanism provides early credit protection by directing excess interest earned towards redemption of Notes in proportion to defaults occurring on the underlying asset portfolio.

Transaction Weaknesses

• The replacement with a Standby Servicer on deterioration of the quality of the primary Servicer is provided for only on termination of the appointment of the primary Servicer, and not by a prior rating- or performance-based trigger. According to GCR’s methodology, this may entail some risk of cash flow disruption. Such possible risk was modelled by GCR in its rating analysis by the removal of a full month of cash receipts from the cash flow model. See Rating Analysis of the Fox Street 7 (RF) Limited Indicative Rating Report for more detail.

• The underlying assets show high historical prepayment behaviour, whose effect, while somewhat mitigated by high redraws, may impact the revenue generated by the asset portfolio as modelled by GCR and introduce term volatility.

Analytical Contacts

Primary Analyst Yehuda Markovitz Structured Finance Analyst
Johannesburg, ZA yehudam@GCRratings.com +27 11 784 1771
Secondary Analyst Vuyisile Madlebe Structured Finance Analyst
Johannesburg, ZA vuyisilem@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 Financial Institution Report – November ’18

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.
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.
Audit Report A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).
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.
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.
Facility The grant of availability of money at some future date in return for a fee.
Financial Institution An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.
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 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.
Pool An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.
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 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.
Proceeds Funds from issuance of debt securities or sale of assets.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Redemption The repurchase of a bond at maturity by the issuer.
Refinance The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.
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.
Servicer A transaction appointed agent that performs the servicing of mortgage loans, loan or obligations.
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.
Subordinated Loan A loan typically given by the Issuer to the securitisation vehicle that is more junior than a junior tranche.
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.
Ultimate Payment A measure of the principal debt, interest, fees and expenses being repaid over a period of time determined by recoveries.
Yield Percentage return on an investment or security, usually calculated at an annual rate.

For a detailed glossary of terms utilized 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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, securities or financial instruments; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

The credit ratings have been disclosed to the Arranger. The ratings above were solicited by, or on behalf of, the Issuer and therefore, GCR is compensated for the provision of the ratings.

Investec participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Investec and other reliable third parties to accord the credit rating included:

  • Indicative pool cut dated 31 July 2019
  • Indicative capital structure
  • Historical performance data (including arrears, defaults and prepayments)
  • Draft Transaction documentation, including:
    • Programme Memorandum
    • Memoranda of Incorporation of Issuer and Security SPV
    • Trust Deeds of Issuer Owner Trust and Security SPV Owner Trust
    • Indemnity
    • Account Bank Agreement
    • Administration Agreement
    • Common Terms Agreement
    • Deeds of Cession and Pledge
    • Guaranteed Investment Contract
    • Deed of Suretyship
    • Guarantee
    • Warehouse Facility Agreement
    • Preference Share Subscription Agreement
    • Pre-Issue Sale Agreement
    • Sale Agreement
    • Servicing Agreement
    • Subordinated Loan Agreement
    • ISDA CSA Master Agreement
    • ISDA CSA Schedule
    • ISDA Swap Confirmation
    • ISDA Schedule
  • Draft legal and tax opinions


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