Announcements Rating Alerts Structured Finance

GCR assigns indicative rating to notes to be issued by AB Finco 2 (RF) Limited

Rating Action

Johannesburg, 18 August 2020 – GCR Ratings (“GCR”) has accorded the following indicative short term issue credit rating to the following Notes to be issued by AB Finco 2 (RF) Limited:

Security Class

Amount

Rating Class

Rating Scale

Rating

Final Redemption Date

Class A

R1,500,000,000

Issue Short Term

National

A1+(ZA)(sf)(IR)

August 2021

The credit rating relates to timely payment of interest and ultimate payment of principal by Final Redemption Date. The rating excludes an assessment of the ability of the Issuer to pay either any (early repayment) penalties or any default interest rate penalties.

Transaction Summary

AB Finco 2 (RF) Limited (the “Issuer”) is expected to issue R1.5bn of Notes under the AB Finco Multi-Issuer Note Programme, administered by Absa Corporate and Investment Banking (“Absa CIB”). This is the second Issuer to issue Notes under the Programme. As such, the Terms and Conditions of the Multi-Issuer Programme apply, including the Priority of Payments.

The Issuer will use the proceeds of the issuance to acquire Participating Assets (being Government Bonds). A typical security structure will be in place, whereby AB Finco 2 Security SPV will execute a limited recourse Guarantee in favour of the Noteholders and the Issuer will indemnify the Security SPV in respect of claims made under the Guarantee. The Issuer will grant a cession in security over the Assets to the Security SPV as security for the Indemnity.

The Issuer will also enter into a master bond Total Return Swap (“TRS”) confirmation agreement with Absa CIB as Derivative Counterparty. Under the TRS, the Issuer will swap income earned on the Participating Assets for a specified return (calculated by applying the swap “Floating Rate”) each quarter. This is the “income return” leg of the TRS.

Upon termination of the TRS, the Issuer will dispose of the Participating Assets it holds, pay to or receive from the Derivative Counterparty a Total Return Amount based on the difference between the initial price and the final price of the Participating Assets as at Notes Issue Date, and redeem the Notes, having the requisite funds to do so through the Total Return Amount. This is the “price return” leg of the swap.

Additionally, in terms of the TRS, “Credit Support” is to be posted on a daily basis. The amount of Credit Support to be posted equals 100% of the daily price change of the Participating Assets. The Derivative Counterparty is to post Credit Support in the form of Government Bonds or cash to the Issuer when the price of the Assets decreases, and the Issuer is to release Participating Assets as Credit Support to the Derivative Counterparty when the price of the Assets increases compared to the initial price. In this way, the market value of Participating Assets plus cash held by the Issuer will be kept constant daily, to equal the principal value of the Notes issued.

TRS termination can take place, inter alia, on failure to pay or deliver (including failure to post Credit Support) by either party. The TRS will likewise terminate on redemption of the Notes that occurs for any reason. Conversely, the Notes are to be redeemed on termination of the TRS, whatever the reason therefor.

The interest rate on the Notes is to be reset by the Issuer each quarter. Such reset would take effect for the upcoming quarter when the Issuer delivers an Interest Rate Adjustment Notice to the Noteholders and the Noteholders respond by agreeing to such adjustment. Should a Noteholder not agree to the proposed reset, then, at the beginning of the upcoming quarter, the TRS will be terminated, and the Issuer will dispose of the Participating Assets and mandatorily redeem all of the Notes.

The Derivative Counterparty is entitled to adjust the TRS Floating Rate, which is used to calculate the quarterly payment it makes to the Issuer. Such adjustment is intended to be made in line with the current market rates for similar Government Bond TRS transactions. Should the Issuer determine that the spread between the TRS Floating Rate and the Notes’ Interest Rate is insufficient to cover the projected Senior Expenses for the upcoming quarter, the Issuer will be required to deliver an Interest Rate Adjustment Notice to propose a reset of the Notes’ Interest Rate to a level such that the spread would suffice. The Arranger has indicated that, for the Transaction’s first quarter, such spread will be 0.04%.

GCR has received a schedule of projected Senior Expenses that the Issuer will need to pay over the life of the Notes. The 0.04% spread to be received by the Issuer is enough to cover these Expenses (incorporating a buffer for unexpected costs), noting however that a portion of ongoing Expenses that relate to the Transaction will be not be carried by the Issuer, but will rather be paid upfront and in advance by Absa Bank Limited prior to the Notes Issue Date, thus relieving the Issuer of these costs, the addition of which the 0.04% spread would not suffice to cover.

Rating Rationale

Transaction Documentation provides for Required Credit Ratings and remedial periods for the replacement of all counterparties to the Transaction should their credit ratings be downgraded below such Required Ratings that are in line with GCR’s Criteria for Rating Structured Finance Transactions. Of particular importance in this regard is the Derivative Counterparty. Should the credit rating of the Derivative Counterparty be downgraded below its Required Rating of A1(ZA), the Issuer is required to replace it within 30 days with a new Derivative Counterparty that has the Required Rating. GCR notes that the Transaction’s provision for mandatory Interest Rate Adjustment to maintain a spread that will cover Senior Expenses secures the adequacy of the new TRS Floating Rate that may be offered by a replacement Derivative Counterparty. As such, a “look-through” to the creditworthiness of the underlying Participating Assets, being Government Bonds, is warranted, as there exists no dependency on the current Derivative Counterparty that might introduce a credit linkage thereto. GCR therefore views the creditworthiness of the Notes to be independent of that of Absa Bank Limited. While Absa Bank Limited will pay for some of the costs of the Issuer, it will do so upfront and in advance, so that no further subsidisation is necessary post issuance. Therefore, the Notes have been accorded an indicative short term national scale issue credit rating of A1+(ZA)(sf)(IR), commensurate with the A1+(ZA) rating of South African Government Bonds. The South African Sovereign, as rated by Moody’s Investor’s Service, S&P Global Ratings and Fitch Ratings, carries International Scale Ratings that map to a National Scale Rating of AAA(ZA).

Note that this indicative rating has been accorded prior to GCR’s receipt of a complete final legal opinion and tax opinion. Should such opinions fail to address the key legal and tax aspects of the contemplated structure, the final rating assigned to the notes may differ from the abovementioned indicative rating.

Analytical Contacts

Primary Analyst

Yehuda Markovitz

Structured Finance Analyst

Johannesburg, ZA

yehudam@GCRratings.com

+27 11 784 1771

     

Secondary Analyst

Gary Nyoni

Structured Finance Analyst

Johannesburg, ZA

garyn@GCRratings.com

+27 11 784 1771

     

Committee Chair

Yohan Assous

Sector Head: Structured Finance Ratings

Johannesburg, ZA

yohan@GCRratings.com

+27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework – May ‘19

Criteria for Rating Structured Finance Transactions – September ’18

Criteria for Rating Credit Linked Notes and Repackaging Vehicles – November ’18

Criteria for Rating Financial Institutions – May ‘19

Absa Bank Limited Rating Review – July ‘20

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S GLOSSARY

Asset

A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.

Bond

A long term debt instrument issued by a company, institution or government to raise funds.

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

A contractual agreement in which a borrower receives something of value now, and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company.

Creditworthiness

An assessment of a debtor’s ability to meet debt obligations.

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.

Derivative

A financial instrument that offers a return based on the return of another underlying asset.

Downgrade

The rating has been lowered on its specific scale.

Guarantee

An undertaking in writing by one person (the guarantor) given to another, usually a bank (the creditor) to be answerable for the debt of a third person (the debtor) to the creditor, upon default of the debtor.

Income

Money received, especially on a regular basis, for work or through investments.

Indemnity

A security or protection against a loss or other financial burden.

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.

International Scale Rating

An opinion of creditworthiness relative to a global pool of issuers and issues.

Issue Date

The date of issue of a new security. Often used as the date from which interest begins to accrue.

Issuer

The party indebted or the person making repayments for its borrowings.

Legal Opinion

An opinion regarding the validity and enforceable of a transaction’s legal documents.

National Scale Rating

National scale ratings measure creditworthiness relative to issuers and issues within one country.

Noteholder

Investor in capital market securities.

For a detailed glossary of terms utilised in this announcement please click here.

 

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, securities or financial instruments being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, securities or financial instruments.

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

Information received from Absa Bank Limited to accord the indicative credit ratings includes:

  • Complete suite of draft transaction documentation,
  • Indicative cost model, including indicative Floating Rate and Notes Interest Rate for initial quarter, and
  • Draft legal opinion

GCR is yet to receive a final legal opinion and tax opinion for the Transaction.

 

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