Johannesburg, 30 June 2020 – GCR Ratings has affirmed the national scale fund rating assigned to Southchester RF Limited of AA-(ZA)(f); Outlook Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Southchester RF Limited||Fund Rating||National||AA-(ZA)(f)||Stable Outlook|
|Fund inception date||01 October 2011|
|Fund currency||South African Rand|
|Fund data review date||31 May 2020|
|Assets under management (“AUM”)||R2.46bn|
|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 underlying asset quality, and performs an evaluation of management, the fund’s historical performance in terms of price/return volatility, market and liquidity risks. The fund rating was based on the following key criteria:
Fund profile: Southchester RF is a public limited liability company that issues senior secured debentures via an insolvency-remote special purpose vehicle to investors, primarily institutional, and invests into a portfolio of high quality, liquid and rated fixed income instruments. The entity is regulated by the South African Reserve Bank in terms of the Banks Act, which is different to the regulatory oversight of other traditional funds, which are regulated by the FSCA under the Collective Investment Schemes Control Act.
Asset manager profile: Southchester RF’s controlling shareholder is Southchester Holdings Trust, while Southchester Investment Managers is the portfolio manager. Southchester Investment Managers is a niche fixed income asset manager specializing in creating and managing short term liquid portfolios and alternative fixed income asset classes. We view the manager to possess the competence, capability and capacity to manage the fund based on skills and experience. In addition, adequate compliance and risk management systems aim to meet performance objectives within mandate constraints.
Investment performance: Southchester RF’s benchmark is the South African Benchmark Overnight Rate, with indicative rates relative to 3 and 12 months also being provided. Southchester RF’s rates are typically 20 – 30 basis points in excess of the respective benchmark. Southchester RF’s investment mandate restricts the portfolio’s weighted average duration to 90 days, which is in line with that of money market funds. However, the mandate allows longer maturities for individual securities, 365 days on fixed rate instruments and 1080 days for floating rate instruments, relative to 13 months/ 390 days for money market funds. As a result, interest rate and spread risk are marginally higher relative to traditional money market funds. Furthermore, due to its legal structure as a public company, it holds equity which has the effect of providing credit enhancement to the structure. At approximately 4% of the assets under management, the equity buffer is modest, but considering the portfolio’s risk profile, it is viewed as adequate to absorb mark to market losses that could be incurred during times of stress in a normal market.
Portfolio quality and market risk: The portfolio’s stress-tested weighted average credit rating of AA(ZA) reflects the portfolio’s high credit quality. With a typical allocation of c.95% of the portfolio exposed to the big four South African banks, counterparty concentration is high. However, this is a common feature in most South African money market funds as a result of mandates that typically limit the investment universe to top tier banks and government backed instruments, as well as the oligopolistic structure of the South African banking sector. Positively, GCR views South Africa’s top tier banks to be robust and well regulated.
The debentures issued by Southchester RF can be relatively long term in nature (typically up to 60 months), however the vast majority have a call feature. This call feature results in Southchester RF having an asset liability liquidity mismatch similar to that of money markets funds. This liquidity risk is increased by the very high investor concentration, with the top 5 investors contributing 81% of the total portfolio at 31 May 2020. Redemptions are satisfied through the sale of assets held overnight (accounting for 32% of portfolio assets at review date), and the utilisation of repurchase agreements (“repos”) on longer maturity assets if required. Continuous reliance on repos for short term liquidity is viewed negatively.
Key fund risks: High counterparty concentration, liquidity risk, and very high investor concentration are Southchester RF’s key risks. Southchester RF has adequate strategies in place to simultaneously meet its investment objectives and manage its liquidity risk. These include maintaining very close relationships with investors to be able to anticipate and plan for large withdrawals, holding high-quality instruments which are liquid in nature and through holding high levels of overnight assets as required.
The Stable Outlook reflects GCR’s expectation of no changes to the mandate and that the fund will continue to invest accordingly.
In light of the ongoing global COVID-19 pandemic, GCR expect a more volatile operating environment for rated funds in South Africa. In particular, we expect unusually high fund flows (more appropriately large drawdowns) which could pose liquidity challenges on the funds and the market in general. Positively, we expect the funds to hold higher than usual liquidity. However, there could also be rapid negative migration in credit quality and the liquidity of invested assets. These factors could bring down the ratings of all rated peers, should the domestic stress increase.
An increase in the WACR, reduction in funding concentrations, strengthening equity buffer, and growth in AUM will be viewed positively. Negative rating action would be taken if there is a decrease in WACR, deterioration in capital and liquidity and/or changes to mandate which we view to be negative.
|Primary analyst||Thandolwenkosi Mkwanazi||Financial Institutions Analyst|
|Johannesburg, ZA||ThandolwenkosiM@GCRratings.com||+27 11 784 1771|
|Committee chair||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||Vinay@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Global Master Criteria for Rating Funds and Asset Managers, updated March 2017|
|Southchester RF Limited Fund rating reports, 2017-19.|
Southchester RF Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Fund rating||Initial||National||AA(ZA)(f)||Stable||September 2017|
|Fund rating||Last||National||AA-(ZA)(f)||Stable||June 2019|
|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.|
|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.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
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, security or financial instrument being rated and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Southchester RF Limited participated in the rating process via telephonic communications and other written and 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.
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;
- Details regarding the fund management, investment management and administration activities of the fund;
- Corporate governance and enterprise risk framework; and
- Industry comparative data and regulatory framework.
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.
- 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). ↑