Lagos, 12 July 2021 – GCR Ratings (“GCR”) has assigned an indicative national scale fund rating* of BBB+(NG)(f)(IR) to SAMTL Mixed Fund; with the outlook accorded as Stable.
|Rated Entity||Rating class||Rating scale||Rating*||Outlook / Watch|
|SAMTL Mixed Fund||Fund rating||National||BBB+(NG)(f) (IR)||Stable|
|*||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).|
The rating will be converted to final fund rating, without any change, upon the establishment of the fund and after it has established a short-track record as long as the characteristics of the fund detailed below have not changed.
Conditions to finalise the indicative (IR) ratings
- The Fund needs to be launched
- FUM must be in line with the indicated asset allocation
- Investment is in line with the expectations below
|Fund inception date||TBD|
|Fund currency||Nigerian Naira|
|Assets under management (“AUM”)||TBD|
Fund profile: SAMTL Mixed Fund (“SAMTL MF”, “the fund”) is structured as an open-ended unit trust scheme, with the objective to achieve capital appreciation for investors. The investment policy permits the fund to invest in Federal Government of Nigeria (“FGN”) securities, fixed tenor deposits, State Government and Corporate Bonds, a small percentage of quoted equities, and other Money Market securities (“MMS”). However, acceptable securities must have a minimum Issuer/Issue rating of ‘AA-(NG)’
Weighted Average Credit Quality (WACQ): Once open, the fund structure is expected to be tilted towards higher quality assets, with about 80% allocation to risk free FGN securities (40% treasury bills and 40% longer-term bonds). The remainder of the funds, in the immediate future, are expected to be in the senior obligations of state and corporate bonds, and MMS. As such, the weighted average credit quality has been accorded at 10.5. We expect market risk to be managed through portfolio diversification (a blend of money market securities). While the proposed class asset of the fund allows for 5% equity investment, which if utilised could bring down the WACQ, the fund manager has confirmed that there would be no equity investment in the foreseeable future, due to the unfavourable market conditions.
Maturity & Duration The fund’s mandate is for a maximum investment duration of 5 years, although the weighted average is yet to be established. We understand that duration risk will be effectively managed down using hedge instruments and that the minimum investment duration will be 90 days. We have therefore assumed a very long (c5years) weighted average maturity (WAM) and weighted average duration (WAD) for the indicative fund rating.
Management & Governance: SAMTL MF is intended to be launched before the end of 2021, with necessary regulatory approval received already. Although the fund manager, Sterling Asset Management and Trustees Limited (“SAMTL”), has a long operational history spanning well over three decades, with various classes of assets under management, it’s expertise for a structured fund management is yet to be tested as this would be the first fund to be launched. We have also taken cognisance of the manager’s flexibility with regards to the fund structure. The investment manager has at least 50 employees, with 8 being investment professionals. Overall, we expect the fund to be managed under the currently strong management and control environment of SAMTL.
Liquidity: Liquidity of the portfolio is expected to be sound, supported by proposed structure of the fund, which permits investment in treasury bills and short-term money market instruments up a limit of 70% of total portfolio. We note the volatility associated with money market, with some of the eligible investment securities potentially exposed to liquidity risk based on market condition. We expect to see investor concentration in the first year of the fund launch and diversification in the following years. In addition, redemption risk is expected to be well managed given the near cash nature of the bulk of the fund. Investors who may opt to redeem their investment units before maturity must give a five-business day notice.
The Stable outlook balances our expectation that the fund will be launched in line with the proposed structure and asset allocation limits. We also expect that the funds would be placed in securities not rated below AA-(NG) as stated in the transaction document.
The rating may be moved upwards following a successful fund launch, strict compliance with the fund’s policy guidelines (as communicated to investors in the Prospectus) and relevant regulatory requirements, a higher WACR based on actual, stable portfolio composition, in addition to establishing and maintaining an acceptable fund performance track record. Lower WAM and WAD could also improve the rating of the fund. Conversely, a negative rating action may arise from an asset quality reduction relative to the proposed portfolio mix and non-compliance with mandate/regulations.
|Primary analyst||Adeyinka Olowofela||Senior Analyst, Financial Institutions|
|Lagos, NG||yinka@GCRratings.com||+234 1 904 9462|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||matthewp@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Rated Entity||Review||Rating class||Rating scale||Rating||Outlook/Watch||Date|
|SAMTL MF||Initial/last||Fund rating||National||BBB+(NG)(IR)||Stable||July 2021|
|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.|
|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.|
|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.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|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.|
|Fixed Deposit||Where funds are deposited in a savings account for a pre-determined period of time.|
|Interest Rate Risk||Interest rate risk in the banking book is the risk that earnings or economic value will decline as a result of changes in interest rates. The sources of interest rate risk in the banking book are repricing/mismatch, basis and yield curve risk.|
|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. 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 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.|
|National Scale Rating||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.|
|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.|
|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.|
|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.|
|Short-Term||Current; ordinarily less than one year.|
|Tenor||The time from the value date until the expiry date of a financial instrument.|
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; 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 fund rating document.
The fund rating has been disclosed to Sterling Asset Management and Trustees Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Sterling Asset Management and Trustees 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 information received from Sterling Asset Management and Trustees Limited Ltd and other reliable third parties to accord the fund rating included:
- The fund trust deed;
- The fund prospectus;
- Financial forecast of the fund;