Johannesburg, 6 June 2017 — Global Credit Ratings (‘GCR’) has accorded a final, public long term credit rating and rating outlook to the following ‘Class A Notes’ to be issued by the Compass Securitisation (RF) Limited (‘Compass’ or the ‘Issuer’) on 6 June 2017:
ZAR240m, Class A4, interest at 3M Jibar + 2.2%, scheduled maturity date of 6 June 2020: .…………………. ‘AAA(ZA)(sf)’, Outlook Stable.
Compass is an existing R1bn Equipment Receivables Backed Note Programme, having been established in 2014. The Issuer will issue an aggregate of R240m in Class A4 Notes and R103m in subordinated unrated Class D4 Notes. The proceeds of the Notes issuance will be used to refinance existing notes issued by the Issuer. The proceeds of the initial notes issuance (in 2014) was utilised to fund a portfolio of equipment lease rentals (and associated equipment) originated by Mercantile Rental Finance (Pty) Ltd (‘MRF’). The claims of each Class of Notes shall be subordinated to higher ranking Classes of Notes and certain other secured creditors in accordance with the Priority of Payments. In this regard, the Class D Notes will be subordinated to the Class A Notes. The notes issued within each class will rank pari passu and pro rata amongst each other.
In terms of the Transaction the Issuer may purchase both fixed and floating interest rate leases from MRF and Mercantile Bank Ltd (‘Mercantile’) on a revolving basis, albeit no fixed rate leases were included in the Issuer’s portfolio (as at April 2017). The Issuer may purchase additional leases during the Revolving Period. Eligibility and portfolio criteria, in combination with amortisation triggers, provide protection against the revolving nature of the Transaction. The Transaction’s performance will depend on the ability of the Servicer and the Back-Up Servicer to collect the equipment lease rentals. GCR is comfortable that both parties are capable of adequately managing this process. MRF (as Servicer) is a wholly owned subsidiary of Mercantile, a licenced domestic banking institution providing a wide range of international and local banking services to the business community, while Mettle Credit Services (Pty) Ltd is an experienced back-up servicer.
GCR reviewed the performance of leases originated by MRF for the period from March 2011 to August 2016 and determined default and recovery base cases in line with GCR’s Global Consumer ABS Criteria. GCR then determined the appropriate stress levels for each rating band and tested the credit enhancement provided to the Class A Notes for the respective rating levels. In this regard, GCR utilised a base case cumulative default rate and recovery rate of 5.9% and 21.2% respectively for its cash flow analysis (based on the portfolio of the Issuer as at 30 April 2017). GCR relied on a cash flow model to determine if the cash flow from the securitised portfolio would be sufficient to service the Transaction at the relevant rating levels. For more information, please read the Compass Securitisation (RF) Limited New Issuance Report to be published on 6 June 2017.
The final, public credit rating accorded to the Class A4 Notes relates to timely payment of interest and ultimate payment of principal. The rating excludes an assessment of the ability of the Issuer to pay either any (early repayment) penalties or any default interest rate penalties. GCR has received satisfactory signed transaction documents.
Senior Structured Finance Analyst
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Structured Finance Analyst
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Sector Head: Structured Finance Ratings
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Structured Finance Rating Criteria, updated Feb ’17;
Global Consumer Asset Backed Securitisation Rating Criteria, updated May’17; and
RATING LIMITATIONS AND DISCLAIMERS
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|Cash Flow||A financial term for monetary changes in operations, investing and financing activities.|
|Claim||A formal request or demand.|
|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 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.|
|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.|
|Creditor||A credit provider that is owed debt obligations by a debtor.|
|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.|
|Floating Interest||An interest rate that changes as the repo or reference rate changes.|
|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.|
|Lease||Agreement or temporary use and enjoyment of a corporeal thing (movable or immovable property) the whole or part thereof for rent. The essential elements of a contract of lease are: 1.) Undertaking of lessor to give the lessee the use and enjoyment of something; 2.) Agreement between the lessor and lessee that the lessee’s right to use and enjoyment is temporary; and 3.) Lessee’s undertaking to pay a sum or rent.|
|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.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Pari Passu||Side by side; at the same rate or on an equal footing. Securities issued with a pari passu clause have rights and privileges that are equivalent to those of existing securities of the same class.|
|Portfolio 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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Proceeds||Funds from issuance of debt securities or sale of assets.|
|Ranking||A priority applied to obligations in order of seniority.|
|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).|
|Receivables||General term for economic benefit derived from an asset.|
|Recovery||The action or process of regaining possession or control of something lost. To recoup losses.|
|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.|
|Rent||Payment from a lessee to the lessor for the temporary use of an asset.|
|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.|
|Secured Creditor||A creditor that has specific assets pledged as collateral that will receive the proceeds in the event of default.|
|Securities||Various instruments used in the capital market to raise funds.|
|Securitisation||Is a process of repackaging portfolios of cash-flow producing financial instruments into securities for sale to third parties.|
|Servicer||A transaction appointed agent that performs the servicing of mortgage loans, loan or obligations.|
|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.|
|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.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating 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.
MRF, the Issuer and 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 ratings above were solicited by the Issuer of the Transaction; GCR has been compensated for the provision of the ratings.
The credit ratings have been disclosed to MRF, the Issuer and the Arranger with no contestation of the ratings.
The information received from MRF and the Arranger include:
- Static Loss and Recovery Data for the period March 2011 to August 2016;
- Issuer NPV portfolio amortisation April 2017;
- Issuer Securitisation reports for the period December 2015 to November 2016 and 31 March 2017;
- Prepayment data for the period April 2011 to March 2017;
- Pool cut of the Issuer’s portfolio as at 30 April 2017;
- Stratification tables per 30 April 2017;
- Capital Structure of the Issuer;
- Historical secondary rental income;
- Expense budget for calendar year 2017;
- Deloitte and Mercantile file review reports;
- Signed AFS of the Issuer for 2013 to 2015 and draft audited AFS for 2016;
- Rental lease agreement templates.