Johannesburg, 11 May 2022 – 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 23 May 2022:
|Security Class||Stock Code||Amount Outstanding||Rating class||Rating scale||Rating||Outlook|
|Class A Notes||MWAR08||R150,000,000||Long Term Issue||National||AAA(ZA)(sf)(IR)||Stable|
The Issuer will use the proceeds from the New Notes 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.
MW Asset Rentals (RF) Ltd is a R2.5bn Lease Receivables Backed Note Programme that has issued R1.55bn 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 Feb 2022.
The Transaction’s Liquidity Reserve, Capital Reserve and Arrears Reserve were maintained at their required levels covering up until Feb 2022.
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 December 2021. GCR calculated the default base cases by extrapolating the monthly vintage curves up to 90 months. This was done separately for loans extended to businesses and loans/leases extended to consumers in line with the National Credit Act and the Consumer Protection Act. GCR calculated the latest default base case, that reflected a weighted average of 2.24% (2.07% for consumer) with a half of the weighted standard deviation of 3.50% (3.90% for consumer) added thereto resulting in Probabilities of Default of 3.99% for non-consumer data and 4.02% for consumer data. These were then weighted (3.99%*95%)+(4.02%*5%) = 3.99%, which was then adjusted by 5% due to the Servicer hit adjustment, resulting in a default base case of 4.19%.
The default base case of 4.19% was then rebased for the aging of the latest pool cut (as at 28th February 2022) resulting in an adjusted base case default rate of 4.21% (Previous: 3.61%). The 28th February 2022 pool cut had 1.91% (R37.4m) 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 then compared the default base case with the concentration risk. At a AAA scenario the PD was modelled at 17.5% with 7 obligors assumed to have defaulted in line with GCR’s criteria.
GCR calculated a weighted average recovery rate of 66.45% (49.54% for consumer data) with a weighted standard deviation of 32.60% (37.49% for consumer data). GCR adjusted the recovery base case assumption to the newly calculated 50.15% (30.80% for consumer data) after adjusting downwards by subtracting half the weighted standard deviation. The consumer and non-consumer recovery rates were then weighted into a single recovery rate (50.15%*95%)+(30.80%*5%) = 49.18%. 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 47.70% (Previous: 67.76%). The decrease in recoveries is the result of a decline in recoveries in 2021 as well as a large increase in standard deviation. The recovery rate for H12021 dropped significantly due to a single obligor default of R10.79m (70% of the H12021 default) which increased the standard deviation significantly. GCR has been informed that the servicer is at an advanced stage of recovery. GCR received updated recovery data until April 2022 and noted a recent increase in recoveries in the Jan – April 2022 period.
GCR made use of prepayment data spanning from April 2015 to December 2021 resulting in a rolling average prepayment rate of 7.35% with a standard deviation of 5.59%. After adjusting upwards for half a standard deviation, the resultant base case prepayment rate was 10.14% (Previous: 10.25%) which was used in the model.
In early May 2022 amendments to the Sale Agreement and Programme Memorandum were made and GCR catered to changes in covenants in its modelling. GCR modelled the asset portfolio at its amended covenant level of 126% Asset Cover Ratio (“ACR”). The ACR was reported at 132.34% for February 2022. In addition, GCR modelled to the following covenants, the aggregate exposure in respect of leases with a balloon payment at the covenanted level of 7.5% (Previous: 2.5%). The aggregate exposure of leases subject to the National Credit Act or Consumer Protection Act cannot exceed 5% (Previous: no leases included). Fixed rate leases were modelled at 5% of the portfolio when calculating the margin buckets (Previous: 12%). The aggregate exposure of leases with an original term of greater than 60 months should not exceed 10% (Previous: 5%) of the total exposure, GCR capped these at 84 months in line with the underlying lease documentation.
The Transaction continues to report positive excess spread. The Weighted Average Yield (less Prime) on the ISAs (“Instalment Sale Agreements”) dropped to a low of 3.92% in October 2021 and then ended at 4.39% as at February 2022.
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.
|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 – Jan ‘22|
MW Asset Rentals (RF) Ltd
|Security class||Stock code||Review||Rating scale||Rating||Outlook||Date|
|Class A Notes||MWAR04||Initial||National||AAA(ZA)(sf)||Stable Outlook||Nov. 2019|
|Last||National||AAA(ZA)(sf)||Stable Outlook||Nov. 2021|
|Class A Notes||MWAR05||Initial||National||AAA(ZA)(sf)||Stable Outlook||Sep. 2020|
|Last||National||AAA(ZA)(sf)||Stable Outlook||Nov. 2021|
|Class A Notes||MWAR06||Initial||National||AAA(ZA)(sf)||Stable Outlook||Feb. 2021|
|Last||National||AAA(ZA)(sf)||Stable Outlook||Nov. 2021|
|Class A Notes||MWAR07||Initial||National||AAA(ZA)(sf)||Stable Outlook||Nov. 2021|
|Class A Notes||MWAR08||Initial||National||AAA(ZA)(sf)(IR)||Stable Outlook||May. 2022|
|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 January 2021 to February 2022;
- Pool cut as at 28th February 2022
- Static Default and Recovery rates to December 2021;
- Static Recovery rates to April 2022;
- Prepayment Rates to December 2021;
- Draft Applicable Pricing Supplement for the MWAR08 Notes;
- Signed Legal Opinion opining on CPA and NCA April 2022;
- First Addendum to the sale agreement – May 2022;
- Second Supplement to the Programme Memorandum – May 2022.