Announcements Rating Alerts Structured Finance & Securitisation

GCR Assigns Indicative Rating of AAA(ZA)(sf)(IR) with a stable outlook to the Series 7 Notes to be issued by MW Asset Rentals (RF) Ltd

Rating Action

Johannesburg, 4 November 2021 – GCR Ratings (“GCR”) has assigned the following national scale long term issue indicative credit rating and outlook to the following Notes to be issued by MW Asset Rentals (RF) Ltd (the “Issuer”), under its R2.5bn Lease Receivables Backed Note Programme (the “Transaction”), around the 22 November 2021:

Security Class Stock Code Amount Outstanding Rating class Rating scale Rating Outlook
Class A Notes MWAR07 R300,000,000 Long Term Issue National AAA(ZA)(sf)(IR) Stable

The Issuer will use the proceeds from the New Notes to refinance the R200m MWAR03 Notes that have a Scheduled Maturity Date of 22 November 2021 and to purchase additional Participating Assets. GCR performed the cash flow modelling of the Transaction using the contemplated capital structure and additional information provided by the arranger for the purpose of the indicative rating. Based on such modelling and information, GCR does not expect the new issuance to have any negative impact on the ratings of the existing notes.

The Transaction has four Subordinated Loans outstanding with an aggregate value of R221,339,156. These are unrated and held by Merchant West (Pty) Ltd (as the Subordinated Loan Provider). Merchant West (Pty) Ltd is also the Originator, Seller and Servicer of the Transaction.

The credit ratings accorded to the Class A Notes relate to timely payment of interest and ultimate payment of principal. The ratings exclude an assessment of the ability of the Issuer to pay either any early repayment penalties or any default interest rate penalties.

Rating Rationale

MW Asset Rentals (RF) Ltd is a R2.5bn Lease Receivables Backed Note Programme that has issued R1.45bn Class A Notes to date.

The Issuer continues to pay quarterly interest on the Class A Notes and Subordinated Loans. The Transaction is in its revolving phase and continues to acquire assets monthly. None of the Transaction’s Stop Purchase Triggers and Portfolio Covenants had been breached as of August 2021.

The Transaction’s Liquidity Reserve, Capital Reserve and Arrears Reserve were maintained at their required levels covering up until August 2021.

GCR considered the cumulative default rates, recovery rates and their timing vectors for this Transaction by analysing the historical vintage data. GCR received default and recovery data that covers the period from April 2009 to August 2021. GCR calculated the default base cases by extrapolating the monthly vintage curves up to 90 months. GCR applied the latest default base case, that reflected a weighted average of 2.01% with a half of the weighted standard deviation of 2.60% added thereto, which was then adjusted by 5% due to the Servicer hit adjustment, resulting in a default base case of 3.47% (previously 4.68%).

The default base case of 3.47% was then rebased for the aging of the latest pool cut (as at 30 September 2021) inclusive of the new assets to be purchased that had 4.27% in arrears assets, resulting in an adjusted base case default rate of 3.49%. The 30 September 2021 pool cut had 1.96% (R39.5m) of NPL accounts. The nominal value of NPL accounts was separately injected into the cash flow model as accounts defaulting in month one and subject to recoveries thereafter.

GCR calculated a weighted average recovery rate of 83.70% with a weighted standard deviation of 16.25%. GCR adjusted the recovery base case assumption from 68.45% to the newly calculated 75.57% after adjusting downwards for half the weighted standard deviation (previously 3.81%). This was adjusted further downward for the covenanted 3% of the portfolio that may be held outside of the Common Monitory Area (“CMA”), with zero recoveries assumed on this 3%. The adjusted recovery base case rate modelled by GCR is 73.31%.

It is important to highlight that the change in the default and recovery base cases compared to the last review (February 2021) is not due to a significant change in the historical performance of the asset portfolio but rather to a change in GCR’s extrapolation method. GCR moved to an incremental extrapolation method as opposed to a growth factor method, leading to both moderately lower cumulative default and recovery rate assumptions. The incremental extrapolation method is deemed to better handle large jumps in the vintage data.

Utilising the prepayment data from April 2015 to August 2021 reported a simple average of 7.40% and a standard deviation of 5.70%. GCR adjusted prepayment base case assumption from 10.55% to 10.25%.

GCR modelled the asset portfolio at its covenant level of 128% Asset Cover Ratio (“ACR”). The ACR was reported at 136.18% for August 2021.

The Transaction continues to report positive excess spread. The Weighted Average Yield (less Prime) on the ISAs (Instalment Sale Agreements) was reported at higher than 4.70% from January to August 2021.

GCR’s cash flow analysis reflects the application of the respective rating scenario stresses as per GCR’s Criteria for Rating Consumer Asset Backed Securities which were applied in adherence with the Transaction’s amortising Pre-Enforcement Priority of Payments. The cash flow analysis indicates that the Transaction can withstand the stresses and assumptions for a rating commensurate with a ‘AAA(ZA)(sf)’ rating scenario.

Analytical contacts

Primary analyst Kyle Bales Structured Finance & Securitisation Analyst
Johannesburg, ZA KyleB@GCRratings.com +27 11 784 1771
Secondary analyst Siyuan Lu Structured Finance & Securitisation Analyst
Johannesburg, ZA SiyuanL@GCRratings.com +27 11 784 1771
Committee chair Yohan Assous Sector head: Structured Finance & Securitisation
Johannesburg, ZA Yohan@GCRratings.com +27 11 784 1771

Related criteria and research

Criteria for Rating Structured Finance Transactions – Sep ’18
Criteria for Rating Consumer Asset Backed Securities – Sep ’18
Criteria for Rating Financial Institutions – May ’19
GCR Rating Scales Symbols and Definitions – May ‘19
Criteria for the GCR Ratings Framework – May ‘19

Ratings history

MW Asset Rentals (RF) Ltd

Security class Stock code Review Rating scale Rating Outlook Date
Class A Notes MWAR03 Initial National AAA(ZA)(sf) Stable Outlook Nov. 2018
Last National AAA(ZA)(sf) Stable Outlook Feb. 2021
Class A Notes MWAR04 Initial National AAA(ZA)(sf) Stable Outlook Nov. 2019
Last National AAA(ZA)(sf) Stable Outlook Feb. 2021
Class A Notes MWAR05 Initial National AAA(ZA)(sf) Stable Outlook Sep. 2020
Last National AAA(ZA)(sf) Stable Outlook Feb. 2021
Class A Notes MWAR06 Initial National AAA(ZA)(sf) Stable Outlook Feb. 2021
Last National AAA(ZA)(sf) Stable Outlook Feb. 2021

Glossary

Arrears Reserve An accounting provision made in a reserve fund for arrears.
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.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Coupon The interest paid on a bond expressed as a percentage of the face value. If a bond carries a fixed coupon, the interest is usually paid on an annual or semi-annual basis. The term also refers to the detachable certificate entitling the bearer to the interest payment.
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.
Credit Risk The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.
Default A default occurs when: 1.) The Borrower is unable to repay its debt obligations in full; 2.) A credit-loss event such as charge-off, specific provision or distressed restructuring involving the forgiveness or postponement of obligations; 3.) The borrower is past due more than 90 days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors.
Excess Spread The net weighted average interest rate receivable on a pool of assets being greater than the weighted average interest rate payable for the debt securities.
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. In insurance, it refers to an individual or company’s vulnerability to various risks
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.
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.
Issuer The party indebted or the person making repayments for its borrowings.
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.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Originator An entity that created assets and hold on balance sheet for securitisation purposes.
Performing Loan A loan is said to be performing if the borrower is paying the interest on it on a timely basis.
Performing An obligation that performs according to its contractual obligations.
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.
Prepayment Rate The rate of prepayment in relation to the pool of obligations. Also called prepayment speed.
Prepayment Any unscheduled or early repayment of the principal of a mortgage/loan.
Recovery The action or process of regaining possession or control of something lost. To recoup losses.
Repayment Payment made to honour obligations in regards to a credit agreement in the following credited order: 3.) Satisfy the due or unpaid interest charges; 4.) Satisfy the due or unpaid fees or charges; and 5.) To reduce the amount of the principal debt.
Reserve (1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.
Servicer A transaction appointed agent that performs the servicing of mortgage loans, loan or obligations.
Subordinated Loan A loan typically given by the Issuer to the securitisation vehicle that is more junior than a junior tranche.
Timely Payment The principal debt, interest, fees and expenses being repaid promptly in accordance with the contractual obligation.
Ultimate Payment A measure of the principal debt, interest, fees and expenses being repaid over a period of time determined by recoveries.
Weighted Average An average resulting from the multiplication of each component by a factor reflecting its importance or, relative size to a pool of assets or liabilities.
Yield Percentage return on an investment or security, usually calculated at an annual rate.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings was 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to Issuer and Arranger. The ratings above were solicited by, or on behalf of, the rated entity, and, therefore, GCR has been compensated for the provision of the ratings.

Issuer participated in the rating process via virtual management meetings, teleconferences and/or other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Issuer and other reliable third parties to accord the credit ratings included:

  • Servicer Reports from Jan 2021 to August 2021;
  • Pool cut as at 30th September 2021
  • Static Default and Recovery rates to August 2021;
  • Prepayment Rates to August 2021;
  • Draft Applicable Pricing Supplement for the MWAR07 Notes;
  • Signed Bring Down Legal Opinion for Feb ‘2021;


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