Announcements

GCR affirms Trust for Urban Housing Finance’s rating of BBB-(ZA); upgrades Outlook to Positive.

Johannesburg, 30 September 2014 — Global Credit Ratings (“GCR”) has affirmed the national scale ratings assigned to Trust for Urban Housing Finance 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 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”, “the group”), based on the following key criteria:

The ratings reflect the intrinsic credit strength of TUHF based on its growing inner-city housing finance franchise, conservative yet profitable business model, strong risk management and governance practices, and ongoing equity and funding partner support.

Capital buffers contracted slightly to 11.3% (FYE13: 12.1%) at FYE14, largely driven by loan growth rates exceeding internal capital generation. However, the recent award of a R200m grant from a new stakeholder should ameliorate capital constraints for the next 2-3 years, increasing the capital buffer and TUHF’s ability to withstand a medium-high stress scenario.

The group’s traditional bilateral loan funding has been sourced from 3-4 key providers. Mitigation of concentration risk should result when the new grant catalyses issuance of R800m in public debt, the structure of which is still to be finalised. Subject to final contracting with the new stakeholder, market conditions and the credit rating achieved on the notes, the first tranche (c.R280m) could be issued in 1H 2015. Liquidity risk has risen as new funding maturities are generally shorter than loan terms, but selected funding lines have flexible terms, allowing renegotiation. That said, general facilities/lines may become more important in mitigating liquidity risk, and facilitating loan pipeline disbursements.

Asset performance deteriorated during F14, with arrears rising to 8.7% (FYE13: 6.5%), and impairments to 3.8% (FYE13: 1.0%) of gross loans, respectively – driven by a seasoning loan book, higher write-offs, and specific impairments related to four properties in Durban. However, conservative provisions and overcollateralised loans mitigate credit risk to a great extent.

Operating income grew 27.1% to R93.9m in F14, with net interest income contributing the majority (c.93%). Higher impairments (F14: R13.3m, F13: R8.4m) and a lower cost ratio 43.1% (F14) vs. 46.2% (F13), led net income to rise 31.6% to R11.1m in F14 (F13: R8.4m). The group’s growth prospects are favourable, given its strong pipeline, the imminent injection of new capital, and the related intention to raise public debt.

Enhanced market positioning, trading performance, financial profile and the portfolio collections track record, as well as grant contract finalisation, could lead to positive ratings momentum. A ratings downgrade may be triggered by diminishing asset quality, lower capitalisation levels, unmanaged liquidity risk, looser credit policies and a weaker franchise.

NATIONAL SCALE RATINGS HISTORY INTERNATIONAL SCALE RATINGS HISTORY
Initial rating (Sep/2013) Initial rating (Sep/2013)
Long term: BBB-(ZA); Short term: A3(ZA) Long term: BB
Outlook: Stable Outlook: Stable
Last rating (Jul/2014) Last rating (Jul/2014)
Long term: BBB-(ZA); Short term: A3(ZA) Long term: BB
Outlook: Stable Outlook: Negative

ANALYTICAL CONTACTS

Primary Analyst
Omega Collocott
Head: Financial Institution Ratings
(011) 784-1771
omegac@globalratings.net

Committee Chairperson
Eyal Shevel
Head: Corporate Ratings
(011) 784-1771
shevel@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Financial Institution Criteria (2014)
Corporate Property Fund Criteria (2014)
Previous Rating report (2013)

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 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 with no contestation of the rating.

The information received from Trust for Urban Housing Finance and other reliable third parties to accord the credit rating included the 31 March 2014 audited annual financial statements (plus four years of comparative numbers), 31 March 2015 budgeted financial statements, 1 April 2014 to 31 July 2014 management accounts, detailed breakdown of the loan portfolio at 31 March 2014, loan performance statistics at 31 July 2014, corporate governance and enterprise risk framework, and a breakdown of facilities available and related counterparties.

The ratings above were solicited by, or on behalf of, the rated client, 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

Collateral

Asset provided to a creditor as security for a loan.

Corporate Governance

The manner in which an entity is governed and decisions are undertaken.

Credit Rating Agency

A party that provides an opinion on the credit quality of assets, debt securities and companies.

Credit risk

Risk that a party to a contractual agreement or transaction will be unable to meet their obligations or will default on commitments. Credit risk can be associated with almost any transaction or instrument such as swaps, repos, CDs, foreign exchange transactions, etc. Specific types of credit risk include sovereign risk, country risk, legal or force.

Default

Failure to make loan payments on a timely basis or to comply with other terms/requirements as stipulated in the loan agreement.

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 and its results of operations for a period then ended.

Franchise

Business or banking franchise; a bank’s business.

Impairment

An amount set aside for expected losses to be incurred by a creditor.

Income Statement

Summary of the effect of revenues and expenses over a period of time.

Liquidity Risk

Liquidity is the ability to fund increases in assets and meet obligations as they become due, without incurring unacceptable losses.

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.

Sovereign Risk

The risk of default by the government of the country on its obligations.

Write-off

The total reduction in the value of an asset.

GCR affirms Trust for Urban Housing Finance’s rating of BBB-(ZA); upgrades Outlook to Positive.

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