Johannesburg, 27th August 2021 – GCR Ratings (“GCR”) has affirmed the following national scale long term issue credit ratings assigned to the Notes issued by AB Finco 1 (RF) Limited (“AB Finco 1” or the “Issuer”) under three separate Series and changed the outlooks of the three series. (each Series issuance is referred to as a “Transaction”).
The rating actions follow the migration of the outlooks for the underlying borrowers’ ratings. The ratings reflect the credit linkage of the Notes to the ability of each Borrower to make the payments due in accordance with the terms of each respective Loan Agreement sold to the Issuer. GCR’s ratings for the issued Notes in respect of each Series are based on a look-through approach to the long-term unsecured credit ratings of the respective underlying Borrowers.
The national scale ratings assigned to the Notes relate to timely payment of interest and timely payment of principal. The ratings exclude an assessment of the ability of the Issuer to pay either any early repayment or default interest rate penalties.
The Notes were issued under the AB Finco Multi Issuer Note Programme, administered by Absa Corporate and Investment Banking (“Absa CIB”). The Programme has two Issuers, although other Issuers may be subsequently established and can accede to the Terms and Conditions of the Programme.
The Issuer established separate Transactions (each a Series under the Issuer) with specific collateral being provided for the benefit of the Notes issued under each respective Transaction. The proceeds from the issuance of the Notes under each Transaction were used to purchase the rights, title and beneficial ownership of a Loan Agreement advanced by Absa CIB to a rated South African Borrower (the “Participating Assets” for each Series) in accordance with Absa’s credit policies.
Our view for the counterparty risk remains the same as at the December 2019 review where it was established that, the structure does not incorporate many counterparties as it is primarily set up for the repackaging of loans. The required ratings and remedial language incorporated in the respective transaction documents for the Account Bank and Permitted Investments are in line with GCR’s counterparty criteria.
Underlying Credit Rating Linkage
The Issuer’s performance in relation to each Transaction is largely reliant on the performance of the underlying Borrower in respect of the Loan Agreement forming the Participating Asset for that Series. GCR adopted a look-through approach between the rating of the Borrower and the rating of the Notes, given that the noteholders in each Series is exposed to a single risk entity, as per GCR’s Credit Linked Notes and Repackaging Vehicles Rating Criteria.
The ratings for the Series 1, 4 and Series 7 Notes reflect the public ratings of the respective Borrowers assigned by any of the three international rating agencies and the rating actions taken by these agencies since Feb 2021.
Cash Reserving Mechanism
All the Issuer’s expenses are paid for using proceeds from payments made by the respective Borrowers from each Series. Each Transaction contributes towards the Issuer’s collective expenses on a pro rata basis. Also, the structure has a profit retention mechanism whereby some of the cumulative excess spread is retained by the Issuer to cater for future expenses plus a buffer. This mechanism is designed to reserve an adequate amount of cash in the structure to allow the Issuer to pay for senior expenses, irrespective of the number of Series in existence.
The latest report received by GCR indicated that enough cash had been reserved in the structure to cater for expected expenses.
GCR received compliance certificates for the Industrial Development Corporation of South Africa (“IDC”) dated 27 November 2020 for the period ending 30 September 2020 as well as for Transnet SOC Ltd (“Transnet”) dated 24 December 2020 for the period ending 30th September 2020. Both certificates indicated the underlying entities are compliant with their covenants. For eThekwini an internal measure of covenants is used, it was indicated that none of these measures have been breached.
|Primary Analyst||Kyle Bales||Analyst: Structured Finance & Securitisation|
|Johannesburg, ZA||KyleB@GCRratings.com||+27 11 784 1771|
|Secondary Analyst||Yehuda Markovitz||Senior Analyst: Structured Finance & Securitisation|
|Johannesburg, ZA||YehudaM@GCRratings.com||+27 11 784 1771|
|Committee Chair||Yohan Assous||Sector head: Structured Finance & Securitisation|
|Johannesburg, ZA||Yohan@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Class of Notes||Underlying Linked Credit||Rating scale||Aug 2020||May 2020||Feb 2021|
|Series 1 Notes||Industrial Development Corporation of South Africa||National||AA+(ZA)(sf)||Negative||n.a||n.a||AA+(ZA)(sf)||Negative|
|Series 3 Notes||MTN Group Ltd||National||AA(ZA)(sf)||Negative||AA(ZA)(sf)||Negative||AA(ZA)(sf)||Negative|
|Series 4 Notes||eThekwini Municipality||National||AA+(ZA)(sf)||Stable||n.a.||n.a.||AA+(ZA)(sf)||Stable|
|Series 7 Notes||Transnet SOC Ltd||National||AA(ZA)(sf)||Stable||AA(ZA)(sf)||Negative||AA(ZA)(sf)||Stable|
|Account Bank||A bank where the transaction account is held.|
|Administrator||A transaction appointed agent responsible for the managing of a Conduit or a Special Purpose Vehicle. The responsibilities may include maintaining the bank accounts, making payments and monitoring the transaction performance.|
|Agent||An agreement where one party (agent) concludes a juristic act on behalf of the other (principal). The agent undertakes to perform a task or mandate on behalf of the principal.|
|Agreement||A negotiated and usually legally enforceable understanding between two or more legally competent parties.|
|Asset/s||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Bankruptcy Remote||A feature, through real security and guarantees that reduces the enforceability of a creditor against a Special Purpose Vehicle. Typically a Security Special Purpose Vehicle should be bankruptcy remote.|
|Bankruptcy||Court proceedings at which an individual or a company is declared unable to pay its creditors. The liabilities of a bankrupt company typically exceed its assets.|
|Borrower||The party indebted or the person making repayments for its borrowings.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Commission||A certain percentage of premiums produced that is received or paid out as compensation by an insurer.|
|Conditions||Provisions inserted in an insurance contract that qualify or place limitations on the insurer’s promise to perform.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.|
|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.|
|Discharge||Performance of obligations in a natural way according to a contractual relationship.|
|Downgrade||The rating has been lowered on its specific scale.|
|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.|
|Insolvent||When an entity’s liabilities exceed its assets.|
|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 Ratings||See GCR Rating Scales, Symbols and Definitions.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|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.|
|Noteholder||Investor of capital market securities.|
|Obligation||The title given to the legal relationship that exists between parties to an agreement when they acquire personal rights against each other for entitlement to perform.|
|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.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Recourse||A source of help in a difficult situation.|
|Redemption||The repurchase of a bond at maturity by the issuer.|
|Repack||Rearrangement of securities with the intent to be more attractive for investment. Junior tranches (that have a higher degree of default risk) of a securitisation transactions that have been repackaged into separate debt securities (according to their degree of risk) that utilise credit-enhancement techniques to mitigate the risk. A CDO is created to distribute the prepayment risk amongst different classes of Notes.|
|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.|
|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.|
|Short Term||Current; ordinarily less than one year.|
|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.|
|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.|
Salient Points 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, securities or financial instruments being rated; and c.) such rating were an independent evaluation of the risks and merits of the rated entity, securities or financial instruments.
The credit ratings have been disclosed to the Absa CIB. The rating was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings. The rated entity participated in the rating process via face-to-face management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The information received from Absa CIB and other reliable third parties to accord the credit rating included:
- Management Report packs to March 2021;
- IDC Compliance Certificate dated 27th November 2020 for the measurement period ending 30 Sep 2020;
- MTN Group Limited Compliance Certificate dated 21st May 2021 for the measurement of the period ending 31 March 2021;
- Transnet Compliance Certificate dated 24th December 2020 for the measurement of the period 30 September 2020.