Announcements

GCR accords a fund rating of AA(ZA)(f) to Southchester RF Limited; Outlook Stable.

Johannesburg, 18 September 2017 — Global Credit Ratings has accorded Southchester RF Limited a national scale fund rating* of AA(ZA)(f); with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above fund rating to Southchester (RF) Limited (“SCRF”, “the fund”), key features of which are summarised below.

Fund summary
Fund currency South African Rand
Fund data review date 30 June 2017
Assets under management (“AUM”) R5.2bn
Net asset value (“NAV”) Market value (variable NAV)
Fund benchmark South African Benchmark Overnight Rate (“SABOR”)

In determining a fund rating, GCR qualitatively assesses the fund’s management, and performs an evaluation of the fund portfolio’s historical performance in terms of price/return volatility, underlying asset quality, and market and liquidity risks. This fund rating was based on the following key criteria:

Fund profile: The objective of the fund is to deliver yields in excess of overnight rates, while prioritising capital preservation, low risk and high liquidity. The fund primarily targets institutional investors. Regulatory, mandate, and investment policy compliance are evident. SCRF features same day liquidity and a maximum portfolio duration limit of 90 days.

Asset manager profile: Southchester Investment Managers (Proprietary) Limited (“SCIM”) is the mandated investment and fund manager, while outsourcing administration, and other selected activities. GCR assesses SCRF as being managed within a very strong fund management and control environment, supporting the rating. The capacity, capability and competence of SCIM is evidenced as facilitating achievement of performance objectives within mandate constraints. Control and compliance processes within/between the various fund counterparties are considered to be strong.

Investment performance: The fund’s return has exceeded the benchmark and repo rate performances over the past 3 years. Volatility over 1, 3 and 5 year time horizons is assessed as moderately low. The trend in AUM is highly volatile driven by SCRF’s largely institutional client profile. As investors typically use the fund as a location for excess cash, and about 99.9% of the fund’s assets are from institutional investors, fund flows may be large, volatile and event-driven, but the fund has adequate strategies in place to simultaneously meet its objectives and investors’ withdrawal needs. Strategies include investor concentration limits, overnight liquidity, use of repurchase agreements (“repos”), and high levels of liquid assets (rated at least ‘AA(ZA)’, or equivalent).

Portfolio quality and market risk: GCR’s portfolio analysis considered credit/ concentration risk, tenor/duration (and limits), and additional sources of market risk. SCRF’s stress-tested weighted average credit rating (“WACR”) is ‘AA(ZA)’.

Key fund risks: Counterparty/investor concentrations, and tenor-based exposure. The fund’s interest rate risk is assessed as low, given the investment focus on money market instruments. SCIM runs an interest rate neutral investment strategy, with WAD restricted to 90 days, while actual average duration and maturity were below mandated upper limits at 30 June 2017. Very high investor concentration reflects the fund’s institutional client base and size. Credit concentration (assessed as very high) is a systemic issue in South Africa, and affects most variable rate, short-term fixed income funds, due to the typically high allocation of bank securities in these funds’ portfolios.

An increase in the WACR of the portfolio, accompanied by a reduction in tenor and stability in concentration /duration metrics could enhance the rating. Mandate breaches, rising investor concentrations, and/or significant deterioration in credit, liquidity and/or market risk metrics could negatively affect the rating.

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* Fund ratings provide an opinion regarding the fund’s ability to preserve principal value under varying market conditions; with reference to the relevant asset management environment (refer to published rating scales and definitions).

NATIONAL SCALE RATINGS HISTORY    
     
Initial/last rating (September 2017)    
Fund rating: AA(ZA)(f)    
Rating outlook: Stable    

ANALYTICAL CONTACTS

Primary Analyst    
Vimbai Muhwati    
Credit Analyst    
(011) 784-1771    
vimbaim@globalratings.net    
     
Committee Chairperson    
Kurt Boere    
Senior Credit Analyst    
(011) 784-1771    
boere@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Funds and Asset Managers, updated March 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. 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.

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 fund rating document.

Southchester RF Limited 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 fund rating has been disclosed to Southchester RF Limited with no contestation of the rating.

The information received from Southchester RF Limited 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;
  • Corporate governance and enterprise risk framework;
  • Industry comparative data and regulatory framework;
  • Draft Programme Memorandum, Security Trust Deed;
  • Fund Management, Administration, Uncommitted Funding, Global Master Repurchase, and Custody Agreements; and
  • Draft Legal and Tax opinions.

The rating above was solicited by, or on behalf of, Southchester RF Limited, and therefore, GCR has been compensated for the provision of the rating.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS 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.
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.
Institutional Investors Financial institutions such as pension funds, asset managers and insurance companies, which invest large amounts in financial markets on behalf of their clients.
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.
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 Rate Risk Interest rate risk in the banking book is the risk that earnings or economic value will decline as a result of changes in interest rates. The sources of interest rate risk in the banking book are repricing/mismatch, basis and yield curve risk.
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.
Overnight Rate The interest rate at which money due to be returned the next day is lent by one bank to another.
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.
Repurchase Agreement In a REPO, one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.
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.
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.
   

For a glossary of terms please click here

GCR accords a fund rating of AA(ZA)(f) to Southchester RF Limited; Outlook Stable.

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