Johannesburg, 31 October 2018 – Global Credit Ratings has affirmed the national scale ratings of BBB(ZA) and A3(ZA) accorded to Trust for Urban Housing Finance Limited (“TUHF”, “the entity”) in the long term and short term respectively; with the outlook accorded as Negative. Furthermore, Global Credit Ratings has affirmed the international scale local currency (LC) rating of Trust for Urban Housing Finance at B+; with the outlook accorded as Stable.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to TUHF based on the following key assumptions:
The ratings reflect the solid niche market position of TUHF in inner-city mortgage finance, moderate leverage, relatively high cost of funding combined with tight liquidity, and better than average risk profile.
TUHF operates in a niche market, focused on providing finance to entrepreneurs for the purchase and/or refurbishment of buildings in the inner cities of South Africa. TUHF lacks revenue diversification, as it operates in a monoline, predominantly providing mortgage finance. The entity does however have a solid niche market position, as a leading lender to inner city commercial real estate.
The entity’s competitive landscape is shifting, with banks increasingly lending to TUHFs more established client segment. This factor has led to increased prepayments, as TUHF is unable to compete on pricing directly with other financial institutions, as a result of more expensive funding.
TUHF’s cost of funding at 9.75% is adequate relative to other non-banking financial institutions, but weak relative to banks and the margins it achieves on its assets. TUHF has taken a strategic decision to not launch subsequent DMTN Programmes and rather launch a mortgage-backed securitization programme to lower the cost of funds. GCR views this positively as we expect the rate on the securitization programme to be 50bps to 75bps lower than that of the previous note issuance, albeit to somewhat little effect to wade off banks from encroaching on their established client segment.
GCR considers the capitalization/ leverage to be moderate. This reflects a total debt to GCR core capital leverage ratio of 5x at FY18. Positively, the company has good headroom over its core leverage covenant, which dictates that the debt to capital (debt + equity) ratio must not exceed 90% (FY18: 84%). Nevertheless, the amount of leverage and the relatively high cost of funds (FY18: 9.75%) has pressurized another core covenant, the debt service coverage ratio, which triggers an event of default if it deteriorates below 1.1 times. At FY18, the debt service cover ratio was 1.2x, which gives the entity little headroom to increase leverage or for income to reduce.
GCR considers the low risk position of TUHF to be its core ratings strength. Low cost of risk, low level of non-performing loans and strong reserve coverage balances the fairly high-risk asset concentrations.
There is limited upside potential on rating. Failure to reduce cost of funding as anticipated, reduction in headroom above covenants, and deterioration in asset quality could negatively impact the rating.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2013)||Initial rating (September 2013)|
|Long-term: BBB-(ZA), Short-term: A3(ZA)||International (LC): BB|
|Rating outlook: Stable||Rating outlook: Stable|
|Last rating (June 2017)||Last rating (June 2017)|
|Long-term: BBB(ZA), Short-term: A3(ZA)||International (LC): B+|
|Rating outlook: Stable||Rating outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Simbarake Chimutanda||Thandolwenkosi Mkwanazi|
|Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Financial Institutions Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Global Criteria for Rating Finance and Leasing Companies, updated March 2017
TUHF Group rating reports (2013-17)
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/RATING-SCALES-DEFINITIONS. 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 ratings were influenced by any other business activities of the credit rating agency; b.) the ratings were 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 ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Trust for Urban Housing Finance Limited 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 credit ratings have been disclosed to Trust for Urban Housing Finance Limited.
The information received from Trust for Urban Housing Finance Limited and other reliable third parties to accord the credit ratings included:
- Financial results of TUHF Group to 31 March 2018 (plus four years of audited comparative numbers);
- A breakdown on the loan book as at September 2018;
- A breakdown of Cashflow forecasts and actuals as at September 2018; and
- Corporate governance and enterprise risk framework.
The ratings above were solicited by, or on behalf of, Trust for Urban Housing Finance Limited (TUHF Ltd), 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
|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.|
|Collateral||Asset provided to a creditor as security for a loan.|
|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.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|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.|
|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.|
|Hedge||A risk management technique used to reduce the possibility of loss resulting from adverse movements in commodity prices, equity prices, interest rates or exchange rates arising from normal banking operations. Most often, the hedge involves the use of a financial instrument or derivative such as a forward, future, option or swap. Hedging may prove to be ineffective in reducing the possibility of loss as a result of, inter alia, breakdowns in observed correlations between instruments, or markets or currencies and other market rates.|
|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.|
|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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Senior Secured Debt||Secured Debt that is paid first in the event of a default.|
|Tenor||The time from the value date until the expiry date of a financial instrument.|
|Tranche||Used to mean an allocation or instalment of a larger loan facility. Tranches of the same debt programme may differ from each other because they pay different interest rates, mature on different dates, carry different levels of risk, or differ in some other way.|
For a detailed glossary of terms please click here
GCR affirms Trust for Urban Housing Finance’s national scale credit rating at BBB(ZA), Outlook Negative.