Announcements Rating Alerts Structured Finance

GCR affirms and upgrades the ratings of various Classes of Notes issued by Nitro 6 (RF) Ltd

Rating Action

Johannesburg, 11 November 2020 – GCR Ratings (“GCR”) has affirmed the credit ratings of the Class C and Class F Notes, upgraded the credit rating of the Class D and revised its Outlook to Positive and upgraded the credit rating of the Class E Notes, all issued by Nitro 6 (RF) Ltd (the “Issuer” or “Nitro 6”). Simultaneously, GCR has withdrawn the credit rating of the Class B Notes issued by the Issuer, which Notes were paid in full on 20 March 2020.

Notes Class Principal Outstanding Rating Class Rating Scale Credit Rating Outlook/Watch
Class B (N6B26) R0 Long Term Issue National WD N.A.
Class C (N6C26) R207,666,000 Long Term Issue National AAA(ZA)(sf) Stable Outlook
Class D (N6D26) R200,000,000 Long Term Issue National AA+(ZA)(sf) Positive Outlook
Class E (N6E26) R65,000,000 Long Term Issue National A-(ZA)(sf) Stable Outlook
Class F (N6F26) R55,000,000 Long Term Issue National BB+(ZA)(sf) Stable Outlook

The R40m Class G Notes outstanding are unrated.

The credit ratings accorded to the rated Notes relate to timely payment of interest and ultimate payment of principal by Final Maturity Dates. 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

The upgrades of the Class D and Class E Notes and the revision of the Outlook of the Class D Notes’ rating are primarily a factor of the sequential repayment of Notes principal on each quarterly Payment Date since the previous surveillance conducted by GCR in May 2019. This incremental amortisation of Notes in descending order of seniority leads to increases in credit enhancement available through subordination to each outstanding Class of Notes (excluding the unrated Class G Notes). The build-up of credit enhancement along with increased seasoning of the underlying pool of Instalment Sale Agreements (“ISAs”) as they mature and the reasonable level of recovery in observed performance thereof despite extremely stressful economic conditions leads to a stressed cash flow modelling outcome whereby these Classes pass under the rating scenarios that are reflected in the ratings accorded to them.

According to GCR’s simulations, the Class D Notes’ interest and principal is repaid in full in the cash flow model even in a AAA(ZA)(sf) scenario. However, in light of the current uncertain economic conditions that directly affect performance of the underlying assets, GCR prudently upgraded the rating of this Class to AA+(ZA)(sf) and revised its Outlook to Positive to indicate that on continued amortisation of the Class C Notes, the Class D Notes’ rating is likely to be upgraded further as per the cash flow model outcome.

The Class F Notes, as the most junior rated Notes, do not pass in the cash flow model even in the most minimally stressed (B+(ZA)(sf)) scenario. This is a result of a correction of a misallocation in GCR’s model of some of the cash flows towards the Notes’ principal redemption, which misallocation caused this Class to pass at BB+(ZA)(sf) at the previous surveillance conducted by GCR in May 2019. Nonetheless, on continued repayment of Notes, even to an amount smaller than the repayment expected at the end of the coming quarter (in December 2020), and the consequential increase in credit enhancement that will become available to the Class F Notes, this Class will pass at BB+(ZA)(sf). As such, Class F’s accorded rating of BB+(ZA) (sf) reflects this near-term expected improvement.

Surveillance

GCR notes the increase in arrears (of 30 to 90 days) from 5.5% to 9.1% of the outstanding portfolio balance of Nitro 6 that occurred over the quarter ending June 2020. Arrears then decreased to 8.2% in the quarter to September 2020. Defaults (90 plus days in arrears and “Classified”) increased from 3.7% to 5.6% of the outstanding portfolio in the quarter to June and then to 7.6% by September. While some degree of accumulation of defaults is natural as the portfolio matures, performance over this period, specifically as reflected in arrears, is reflective of the extreme economic stress surrounding the COVID-19 pandemic and associated lockdown. The moderation in arrears in the most recent quarter is indicative of the easing of lockdown measures and some degree of recovery.

The payment relief granted by WesBank (as Originator and Servicer of Nitro 6) to its ISA customers was analysed by GCR. While the level of payment holidays in the Nitro 6 portfolio had not yet reduced as at September 2020, with 7.6% of the outstanding principal currently benefitting from the term-extension type three-month payment holidays granted to non-FNB banked customers, WesBank has communicated that payment holidays on book are expected to decrease in the near term, with recently granted relief a result of applications that were made in previous months but which took time to be finalised.

It is significant that the transaction earned negative excess spread of -1.4% annualised of Notes outstanding in the quarter to June 2020. This negative income was a direct result of the reduced instalments collected over this quarter, as mirrored in the high arrears rate, and, significantly, the markedly lower-than-usual prepayments made over this period. The partial recovery of both of these metrics led to excess spread rebounding to positive over the following quarter, at 0.2% annualised.

Overcollateralisation is comprised of accumulated excess spread of c.R40m as at September 2020, the cash reserve which is funded at its required amount of c.R12m, and defaulted assets.

Please see the Nitro 6 (RF) Ltd Surveillance Report to be published in November 2020 for more detailed surveillance analysis.

Cash Flow Model

The main inputs that direct the cash flow model outcome include the base case default rates, recovery rates, prepayment rates and senior expenses.

GCR analysed the defaults that occurred in the total WesBank Floating Interest Rate portfolio up to June 2020 and noted an uptick in defaults over the most recent quarter. This uptick applies to both the amortising and balloon types of ISAs that make up the asset pool and leads to increased extrapolated cumulative default rates derived as per GCR’s Criteria for Rating Consumer Asset Backed Securities. As per its methodology, GCR then applied credit for seasoning to the derived default rates, having assessed the level of seasoning of the ISAs to be approximately 70%. The resulting adjusted default rates, once rebased to the current outstanding asset pool balance, are lower than the base case default rates used for the initial rating and the previous surveillance. As a conservative measure and given the recent deterioration in observed performance, GCR maintained the previously used default rates in the cash flow model for the current surveillance.

GCR received WesBank recoveries data that is updated to June 2019. While outdated, new data definitions applied by WesBank imply that these recoveries data are more accurate than those used for the recoveries base case of the previous surveillance as the interest portion of recoveries is not included therein and the estimate for adjustment done by GCR is no longer necessary. Therefore, GCR updated its recoveries base case based on this data, resulting in a slight increase in modelled recoveries. Given the increased seasoning and the resulting build-up of customers’ equity in the ISAs as well as GCR’s understanding that used car prices have not declined to any significant degree since June 2019, GCR is comfortable with its updated recoveries assumption. GCR updated its prepayments base case in accordance with historical WesBank prepayments data to June 2020. Senior expenses as modelled previously were slightly higher than the reported senior expenses of the past year. Conservatively, this input was not changed for the current surveillance.

To model the cash flow interruption resulting from payment relief in the Nitro 6 portfolio, GCR removed 7.5% of cash inflows over the first modelled quarter, approximately reflecting the current level of term-extension type payment holidays on book.

In consideration of the current uncertainty and observed malperformance over the quarter ending June 2020, while noting the partial recovery since then, GCR applied additional stresses in its cash flow model – a 10% increase in the default base cases and a cash flow interruption whereby 10% of inflows are removed for two quarters (instead of the abovementioned 7.5% over one quarter). As described in the Rating Rationale section above, the increase in credit enhancement through subordination allows for the various Classes of Notes to pass with interest and principal paid in the model even under these additional stresses, with, as mentioned, Class D passing at one notch higher than its accorded rating and Class F passing at its accorded rating only in a prospective scenario of slightly reduced Class C Notes outstanding.

See the Nitro 6 (RF) Ltd Surveillance Report to be published in November 2020 for a comprehensive description of GCR’s analysis of the factors outlined immediately above.

Analytical Contacts

Primary analyst Yehuda Markovitz Structured Finance and Securitisation Analyst
Johannesburg, ZA YehudaM@GCRratings.com +27 11 784 1771
Secondary analyst Corné Els Senior Structured Finance and Securitisation Analyst
Johannesburg, ZA CorneE@GCRratings.com +27 11 784 1771
Committee chair Yohan Assous Sector Head: Structured Finance and Securitisation
Johannesburg, ZA Yohan@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for Rating Structured Finance Transactions, Sep 2018
Criteria for Rating Consumer Asset Backed Securities, Sep 2018

Ratings History

Notes Class Review Rating scale Credit Rating Outlook/Watch Date
Class B (N6B26) Initial National AAA(ZA)(sf) Stable Outlook April 2018
Last National AAA (ZA)(sf) Stable Outlook May 2019
Class C (N6C26) Initial National AAA(ZA)(sf) Stable Outlook April 2018
Last National AAA(ZA)(sf) Stable Outlook May 2019
Class D (N6D26) Initial National AA-(ZA)(sf) Stable Outlook April 2018
Last National AA- (ZA)(sf) Stable Outlook May 2019
Class E (N6E26) Initial National BBB+(ZA)(sf) Stable Outlook April 2018
Last National BBB+(ZA)(sf) Stable Outlook May 2019
Class F (N6F26) Initial National BB+(ZA)(sf) Stable Outlook April 2018
Last National BB+(ZA)(sf) Stable Outlook May 2019

Glossary

Agreement A negotiated and usually legally enforceable understanding between two or more legally competent parties.
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 Backed Securities Securitisation: debt securities issued that are backed or covered by a pool of assets or receivables (Auto loans and leases, consumer loans, commercial assets, credit cards, mortgage loans).
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.
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.
Conditions Provisions inserted in an insurance contract that qualify or place limitations on the insurer’s promise to perform.
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 90 days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors.
Equity Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
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.
Floating Interest An interest rate that changes as the repo or reference rate changes.
Income Money received, especially on a regular basis, for work or through investments.
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.
Junior A security that has a lower repayment priority than senior securities.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Originator An entity that created assets and hold on balance sheet for securitisation purposes.
Payment Date The date on which the payment of a coupon or dividend is made.
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 Rate The rate of prepayment in relation to the pool of obligations. Also called prepayment speed.
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.
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.
Reserve (1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.
Seasoning The age of an asset, the time period passed since origination.
Securities Various instruments used in the capital market to raise funds.
Senior A security that has a higher repayment priority than junior securities.
Servicer A transaction appointed agent that performs the servicing of mortgage loans, loan or obligations.
Spread The interest rate that is paid in addition to the reference rate for debt securities.
Subordination The prioritising of the payment of interest and principal payments to tranches (senior, junior etc. Senior tranches are paid before junior tranches.
Surveillance Process of monitoring a transaction according to triggers, covenants and key performance indicators.
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.
Upgrade The rating has been raised on its specific scale.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the rating is influenced by any other business activities of the credit rating agency; b.) the ratings are based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings are an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to the issuer. The rating was solicited by, or on behalf of, the Issuer, and, therefore, GCR has been compensated for the provision of the ratings. The issuer participated in the rating process verbal and written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The information received from the issuer and other reliable third parties to accord the credit rating included:

  • Investor reports until September 2020
  • Default and prepayments data as at Q2 2020
  • Recovery data as at Q2 2019
  • Other miscellaneous data and presentations
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