Johannesburg, 1 October 2019 – GCR Ratings (“GCR”) has assigned an indicative rating* of AA(ZA)(f)(IR) on the yet to launch Prescient Corporate Money Market Fund (“PCMMF”, “the fund”).
|Rated Entity||Rating class||Rating scale||Rating*||Outlook / Watch|
|Prescient Corporate Money Market Fund||Indicative rating||National||AA(ZA)(f)(IR)||n.a|
* Indicative Ratings are denoted by an (IR) suffix, they reflect an expected issue(r) rating post the completion of a specific and well-defined set of events. Typically, they are short-term (up to 90days) and may be converted into full ratings upon completion of the event.
|Fund currency||South African Rand|
|Fund data review date||16 September 2019|
|Assets under management (“AUM”)||R0.00|
|Net asset value (“NAV”)||Targeted constant price of R1.00|
|Fund benchmark||STeFI Call Deposit Index (“STeFI Call”)|
Fund rating factors: GCR performs a qualitative assessment on the fund’s management as well as a quantitative evaluation of the fund’s portfolio expected performance in terms of price/return volatility, underlying asset quality, and market and liquidity risks. The Prescient Corporate Money Market Fund (“PCMMF”,” the fund”) has not yet been launched, pending the fund’s application approval by the Financial Sector Conduct Authority (“FSCA”), therefore the assessment of the fund is solely based on our expectations. Consequently, an indicative rating is assigned to the fund with the expectation of converting it to a fund rating upon review of the fund’s attributes post launch. As such, GCR assigned an indicative rating to the PCMMF based on the key rating considerations given below.
Fund profile: PCMMF aims to provide regular stable income for investors while preserving capital. The fund will invest in short term and money market instruments issued by the four largest banks in South Africa, thus providing daily liquidity to investors. Nonetheless, the fund has flexibility to invest in other financial instruments in changing economic or market conditions. PCMMF is expected to comply with CISCA BN90 limits and constraints. However, it will not be subject to the Prudential Investment Guidelines for South African Retirement Funds. The fund’s allowable limit on individual instrument maturity is 13 months.
Asset manager profile: Prescient Management Company (“PMC”), PCMMF’s Manco, ensures that regulatory and operational conditions necessary for the fund to achieve its investment objectives are met. In this regard, PMC appointed Prescient Investment Management (“PIM”) as the investment manager responsible for the full discretionary management of the fund’s investment portfolio, ongoing risk management and compliance of the fund. PIM has a 21-year track and its AUM sat at R94.7bn in Sept-19. The investment manager has at least 40 employees, with 25 being investment professionals. PMC outsourced all administration services to PFS. Overall, we expect the fund to be managed under the currently strong management and control environment of PIM.
Investment performance: PCMMF’s funds under management are expected to originate from corporate treasury departments through selected representatives. While the capacity of the fund is uncapped, the investment manager reserves the right to open or close the fund to new investors on a date determined by the manager. We currently reserve our view on AUM expectations, but will however monitor progress from the launch date going forward. The fund aims to outperform the STeFI Call benchmark after fees. In our opinion, the fund will most likely perform in line with other GCR rated corporate money market funds, should it adhere to the respective guidelines and limits of its mandate. Liquidity of the portfolio is envisaged to be high, supported by investments in short term money market instruments. Conversely, we think that the fund’s liquidity risk will initially be high due to our expectations of high investor concentration during the fund’s early stages, however gradually decreasing with time as AUM accumulates.
Portfolio quality and market risk: GCR’s portfolio analysis considers credit/ concentration risk, tenor/duration (and limits), NAV volatility, and additional sources of market risk, in addition to a stress-tested weighted average credit rating(‘WACR”). We forecast a stress-tested WACR of AA(ZA) based on the current credit ratings of the four largest banks. The fund’s credit concentration is projected to be high, albeit a neutral rating factor because credit concentration is a systematic issue affecting most short-term income funds in South Africa. Interest rate risk is anticipated to be low to moderate on the back of a 90-day weighted average duration (”WAD”) limit, while the same is forecast for spread risk given a weighted average maturity (“WAM”) limit of 120 days as per the mandate. The fund is a constant NAV fund with a daily unit price of 100cents, therefore minimal daily volatility is expected.
Over the next 90 days, this indicative rating could either be converted into a fund rating upon receipt of post launch fund information, renewed if there is a delay in the information of the fund, or withdrawn should GCR deem it necessary for whatever reason.
For the indicative rating to be converted into a full rating, we would expect to see the following:
- Approval by the FSCA,
- AUM accumulation,
- Portfolio holdings comprising short term instruments of the four largest banks only,
- 30% credit exposure limit per bank,
- WAD within mandate limit, and
- WAM within mandate limit.
|Primary analyst||Nyasha Chikwengo||Financial Institutions Analyst|
|Johannesburg, ZA||nyashac@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Sector Head: Financial Institution Ratings|
|Johannesburg, ZA||matthewp@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Global Master Criteria for Rating Funds and Asset Managers, March 2017|
|Rated Entity||Review||Date||Rating class||Rating scale||Rating||Outlook / Watch|
|Prescient Corporate Money Market Fund||Initial/Last||2019-09-27||Indicative rating||National||AA(ZA)(f)(IR)||n.a|
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|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.|
|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.|
|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.|
|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.|
|Trustee||A person or firm that holds or administers property or assets for the benefit of a third party.|
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 Prescient Investment Manager (Pty) Ltd. 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.
Prescient Investment Management (Pty) Ltd 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 Prescient Investment Management (Pty) Ltd and other reliable third parties to accord the fund rating included:
- Audited financial results of Prescient Investment Management (Pty) Ltd as at 31 March 2019;
- Management accounts as at 30 June 2019;
- Main, amendments and supplemental deeds
- Financial Sector Conduct Authority motivation letter
- Feasibility study.