Johannesburg, 30 September 2015 — Global Credit Ratings has affirmed the national scale ratings assigned to Trust for Urban Housing Finance (TUHF Group) of BBB-(ZA) in the long term and A3(ZA) in the short term, with the outlook accorded as Positive. Furthermore, GCR has affirmed the international scale rating assigned to Trust for Urban Housing Finance (TUHF Group) of BB; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Trust for Urban Housing Finance (“TUHF Group”) based on the following key criteria:
The ratings reflect the intrinsic credit strength of TUHF Group, based on its growing inner-city housing finance business, conservative yet profitable operating model, strong risk management/governance practices, and ongoing equity and funding partner support.
Delays in the finalisation of a R200m grant awarded to TUHF Group by National Treasury’s ‘Jobs Fund’, which is being used as a catalyst for raising an additional R800m in public debt through a Domestic Medium Term Note (“DMTN”) programme, has constrained TUHF Group’s growth ambitions.
Net loans grew by 8.1% in F15 (F14: 20.9%), driving growth in total operating income of 14.5%. Pre-tax profit growth of 8.7% to R44m (F14: R40m) was negatively impacted by increased operating expenses.
Despite slower than anticipated loan growth, and higher funding costs impacting interest margins, TUHF Group’s internal capital generation rate was maintained at 13-14%. This supported the capital/assets ratio at a stable level of 11.3%, which GCR deems adequate relative to TUHF Group’s current asset mix and risk levels.
Asset performance is generally considered to be strong. While arrears remained at around 8% of gross loans, future expected losses are well provided for, and collateral (which exceeds the loan amount in each case) is perfected and of high quality.
Liquidity risk has risen as new funding maturities are generally shorter than loan terms, but selected funding lines have flexible terms, allowing for renegotiation. That said, general facilities/lines may become more important in mitigating liquidity risk, and facilitating loan pipeline disbursements.
Management anticipates concluding all ‘Jobs Fund’ related funding agreements in F16, which will enable TUHF Group to disburse its strong pipeline of approvals, proceed with its DMTN programme, and expand its national footprint.
Finalisation of all ‘Jobs Fund’ related funding agreements, and associated business development, while maintaining TUHF Group’s trading performance, financial profile and portfolio collections track record, could lead to positive ratings movement. A ratings downgrade may be triggered by diminishing asset quality, lower capitalisation levels, unmanaged liquidity risk, looser credit policies and/or TUHF Group’s inability to raise additional debt and equity funding.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2013)||Initial rating (September 2013)|
|Long term: BBB-(ZA); Short term: A3(ZA)||Long term: BB|
|Outlook: Stable||Outlook: Stable|
|Last rating (September 2014)||Last rating (September 2014)|
|Long term: BBB-(ZA); Short term: A3(ZA)||Long term: BB|
|Outlook: Positive||Outlook: Stable|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
Global Criteria for Rating Finance and Leasing Companies, updated March 2015
TUHF Group rating reports (2013-14)
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 credit rating document.
Trust for Urban Housing Finance (TUHF Group) 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 credit rating/s has been disclosed to Trust for Urban Housing Finance (TUHF Group) with no contestation of the rating.
The information received from Trust for Urban Housing Finance (TUHF Group) and other reliable third parties to accord the credit rating(s) included:
- Audited financial results of TUHF Group to 31 March 2015 (plus four years of comparative numbers);
- Management accounts of TUHF Group to 31 July 2015;
- Latest internal and/or external audit reports to management;
- A breakdown of facilities available and related counterparties; and
- Corporate governance and enterprise risk framework.
The ratings above were solicited by, or on behalf of, Trust for Urban Housing Finance (TUHF Group), and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|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||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Audit Report||An audit report is a written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Capital||The sum of money that is invested to generate proceeds.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Corporate Governance||Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|Equity||Equity (or shareholders’ funds) 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.|
|Exchange||A standardised marketplace in which different assets are traded.|
|Expected Loss||Losses that a bank expects to bear over a certain period (generally a year). These losses are a consequence of doing business, namely the bank’s role as financial intermediary.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Fraud||The unlawful and intentional making of a misrepresentation which causes actual and or potential prejudice to another.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|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.|
|International Scale Rating||ISRs relate to either foreign currency or local currency commitments, assessing the capacity of an issuer to meet these commitments using a globally applicable (and therefore internationally comparable) scale.|
|Lease||Conveyance of land, buildings, equipment or other assets from one person (lessor) to another (lessee) for a specific period of time for monetary or other consideration, usually in the form of rent.|
|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.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|REPO||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.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short Term||Current; ordinarily less than one year.|
For a detailed glossary of terms utilised in this announcement please click here