Announcements Rating Alerts Structured Finance & Securitisation

GCR Assigns Indicative Rating to Notes to be Issued by AB Finco 1 (RF) Limited under Series 5

Rating Action

Johannesburg, 12th October 2021 – GCR Ratings (“GCR”) has assigned the following national scale long term indicative issue credit rating and outlook to the following Notes (the “New Notes”) to be issued by AB Finco 1 (RF) Limited (“AB Finco 1” or the “Issuer”) under its new Series, Series 5, on or about 18th October 2021.

Transaction Stock Code Amount Rating Class Rating Outlook
Series 5 ABF005 R500m Long Term Issue AA+(ZA)(sf)(IR) Positive

The national scale ratings assigned to the Notes relate to timely payment of interest and timely payment of principal. The ratings exclude an assessment of the ability of the Issuer to pay either any early repayment or default interest rate penalties.

Rating Rationale

The rating of the Notes reflects the ability of each underlying borrower to make the payments due in accordance with the terms of each respective Loan Agreement sold to the Issuer. GCR’s ratings of the issued Notes in respect of each Series are therefore based on a credit linkage approach to the long-term unsecured credit ratings of the respective underlying borrowers. The borrower under Series 5 is eThekwini Municipality (“eThekwini” or the “Borrower”). In according the indicative rating, GCR took cognisance of the existing R506m Series 4 Notes in issue, where the underlying borrower is also eThekwini.

The Notes are to be issued under the AB Finco Multi Issuer Note Programme, administered by Absa Corporate and Investment Banking (“Absa CIB”). The Programme has two Issuers (AB Finco 1 and AB Finco 2 (RF) Ltd), although other Issuers may subsequently be established that can accede to the Terms and Conditions of the Programme.

The Issuer establishes separate Transactions (each a Series under the Issuer) with specific collateral being provided for the benefit of the Notes issued under each respective Transaction. The proceeds from the issuance of the Notes under each Transaction are used to purchase the rights, title and beneficial ownership of advances under a Loan Agreement advanced by Absa CIB to a borrower (the “Participating Assets” for each Series) in accordance with Absa’s credit policies.

Counterparty Risk

The required ratings and remedial language for the Account Bank and Permitted Investments that are incorporated in the respective transaction documents are in line with GCR’s counterparty criteria.

Underlying Credit Rating Linkage

The Issuer’s performance in relation to each Transaction is largely reliant on the performance of the underlying borrower in respect of the Loan Agreement forming the Participating Asset for that Series. GCR adopted a look-through approach between the rating of the Borrower and the rating of the Notes, given that the Noteholders in each Series are exposed to a single borrower, as per GCR’s Credit Linked Notes and Repackaging Vehicles Rating Criteria.

The indicative rating for the Series 5 Notes reflects the public rating of the relevant Borrower, eThekwini Municipality, as assigned by GCR.

Cash Reserving Mechanism

All the Issuer’s expenses are paid for using proceeds from payments made by the respective borrowers from each Series. Each Transaction contributes towards the Issuer’s collective expenses on a pro rata basis. Also, the structure has a contractually required profit retention mechanism whereby some of the cumulative excess spread is retained by the Issuer to cater for future expenses, plus a 10% buffer. This mechanism is designed to reserve an adequate amount of cash in the structure to allow the Issuer to pay for senior expenses, irrespective of the number of Series or amount of Participating Assets outstanding.

The latest data received by GCR indicates that sufficient funds have been reserved in the structure to cater for expected expenses.

Compliance Certificates

GCR has been notified that, as at the Financial Year end 2020, eThekwini was in compliance with its covenants under the Loan Agreement that will constitute the Participating Asset under Series 5.

Analytical Contacts

Primary Analyst Kyle Bales Analyst: Structured Finance & Securitisation
Johannesburg, ZA KyleB@GCRratings.com +27 11 784 1771
Secondary Analyst Yehuda Markovitz Senior Analyst: Structured Finance & Securitisation
Johannesburg, ZA YehudaM@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 Credit Linked Notes and Repackaging Vehicles – Nov ’18
Criteria for Rating Financial Institutions – May ’19
Criteria for Rating Corporate Entities – May ‘19
Criteria for the GCR Ratings Framework – May ‘19
GCR Rating Scales Symbols and Definitions – May ‘19

Ratings History

AB Finco 1 (RF) Ltd – Series 1 Notes (IDC)

Rating class Review Rating scale Rating Outlook Date
Long Term issuer Initial National AA+(ZA)(sf) Stable Dec 2019
Last National AA+(ZA)(sf) Stable Aug 2021

AB Finco 1 (RF) Ltd – Series 3 Notes (MTN)

Rating class Review Rating scale Rating Outlook Date
Long Term issuer Initial National AA(ZA)(sf) Negative Dec 2019
Last National AA(ZA)(sf) Negative Feb 2021

AB Finco 1 (RF) Ltd – Series 4 Notes (eThekwini)

Rating class Review Rating scale Rating Outlook Date
Long Term issuer Initial National AA+(ZA)(sf) Stable Aug 2020
Last National AA+(ZA)(sf) Positive Aug 2021

AB Finco 1 (RF) Ltd – Series 7 Notes (Transnet)

Rating class Review Rating scale Rating Outlook Date
Long Term issuer Initial National AA(ZA)(sf) Stable Dec 2019
Last National AA(ZA)(sf) Negative Aug 2021

Glossary

Account Bank A bank where the transaction account is held.
Advance A lending term, to transfer funds from the creditor to the debtor.
Agreement A negotiated and usually legally enforceable understanding between two or more legally competent parties.
Asset A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Borrower The party indebted or the person making repayments for its borrowings.
Cash Funds that can be readily spent or used to meet current obligations.
Collateral Asset provided to a creditor as security for a loan or performance.
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.
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 X 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.
Financial Institution An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.
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.
Loan A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond.
National Scale Rating National scale ratings measure creditworthiness relative to issuers and issues within one country.
Noteholder Investor of capital market securities.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
Pro Rata (1) Distribution of the amount of insurance under one policy among several objects or places covered in proportion to their value or the amounts shown. (2) Distribution of liability among several insurers having policies on a risk, usually in the proportion that the amount of coverage in each policy bears to the total amount of coverage in all policies.
Proceeds Funds from issuance of debt securities or sale of assets.
Public Ratings See GCR Rating Scales, Symbols and Definitions.
Rating Linkage The credit rating link that exists in between a holding company and its subsidiary or between two or more transactions parties where the reliance is based upon perceived performance or support from such party. There is dependence on one party to provide support to the transaction.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Repack Rearrangement of securities with the intent to be more attractive for investment. Junior tranches (that have a higher degree of default risk) of a securitisation transactions that have been repackaged into separate debt securities (according to their degree of risk) that utilise credit-enhancement techniques to mitigate the risk. A CDO is created to distribute the prepayment risk amongst different classes of Notes.
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.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Securitisation A process of repackaging portfolios of cash-flow producing financial instruments into securities for sale to third parties.
Senior A security that has a higher repayment priority than junior securities.
Spread The interest rate that is paid in addition to the reference rate for debt securities.
Stock Code A unique code allocated to a publicly listed security.
Structured Finance A method of raising funds in the capital markets. A Structured Finance transaction is established to accomplish certain funding objectives whist reducing risk.
Timely Payment The principal debt, interest, fees and expenses being repaid promptly in accordance with the contractual obligation.
Transaction A transaction that enables an Issuer to issue debt securities in the capital markets. A debt issuance programme that allows an Issuer the continued and flexible issuance of several types of securities in accordance with the programme terms and conditions.

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

The credit rating has been disclosed to Absa CIB. The rating was solicited by, or on behalf of, the Issuer, and therefore, GCR has been compensated for the provision of the ratings. The Issuer participated in the rating process via virtual 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 Absa CIB and other reliable third parties to accord the credit rating included:

  • Management Report packs to June 2021;
  • Draft Legal Opinion (received September 2021) – AB Finco 1 (RF) Ltd; and
  • ENSafrica Enforceability, Authority and Capacity Legal Opinion dated 28th June 2021
  • Executed Term Loan Facility Agreement dated 25th June 2021
  • Draft Applicable Pricing Supplement
  • Draft Bank Agreement
  • Draft Guarantee
  • Draft Guarantee Custody Certificate
  • Draft Indemnity
  • Draft Participating Assets Acquisition Agreement
  • Draft Security Cession
  • Draft Transaction supplement


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