Johannesburg, 13 September 2019 – GCR Ratings (“GCR”) accorded the following indicative, public long-term credit ratings to the following Notes (the “New Notes”) to be issued by TUHF Urban Finance (RF) Ltd (the “Issuer”), under its R2bn Mortgage Loan-Backed Securitisation Scheme (the “Transaction”):
|Security Class||Stock Code||Amount Outstanding||Rating class||Rating scale||Rating||Outlook / Watch|
|Class A1 Notes||TU1A12||R115,500,000||Issue Long Term||National||AA-(ZA)(sf)(IR)||Stable Outlook|
|Class B Notes||TU1B12||R13,500,000||Issue Long Term||National||BBB-(ZA)(sf)(IR)||Stable Outlook|
In addition to the New Notes, the Issuer will issue Class D Notes (R6m) and Class E Notes (R15m) both unrated, which act as credit enhancement for the Class A1 Notes and Class B Notes. Given the above-mentioned, a total of R150m worth of notes are scheduled to be issued on or about 30 September 2019 (the “New Issuance”). The Indicative Ratings are scheduled to expire on 11 October 2019.
|Security Class||Stock Code||Amount Outstanding||Rating class||Rating scale||Rating||Outlook / Watch|
|Class A1 Notes||TU1A11||R385,000,000||Issue Long Term||National||AA-(ZA)(sf)||Stable Outlook|
|Class B Notes||TU1B11||R45,000,000||Issue Long Term||National||BBB-(ZA)(sf)||Stable Outlook|
Under the December 2018 issuance, the Issuer has Class D Notes (R20m) and Class E Notes (R50m) that are unrated and act as credit enhancement for the Class A1 Notes (TU1A11) and Class B Notes (TU1B11). A total of R500m worth of notes were issued.
The affirmation of the ratings follows the concurrent surveillance of the Transaction’s performance.
The credit ratings accorded to the Class A1 Notes relate to timely payment of interest and ultimate payment of principal by their Final Redemption Date. The ratings accorded to all the other securities relate to ultimate payment of interest and principal by their Final Redemption Date. The ratings exclude an assessment of the ability of the Issuer to pay either any (early repayment) penalties or any default interest rate penalties.
GCR took note of the recent inner-city unrest, whose possible effects are somewhat mitigated by the fact that the underlying assets consist of residential accommodation situated in specific areas. In addition to the summary below, GCR may take ratings action should there be a deterioration of borrowers’ ability to service their mortgage obligations, which is underpinned by tenants occupying residential accommodation, and/or if the perceived value of the properties deteriorates below GCR’s assumptions.
The Mortgage Loans are originated by Trust for Urban Housing Finance Ltd (Long Term Issuer Rating of BBB(ZA) with a Negative Outlook), which operates as a non-bank financial services provider. The planned New Issuance follows from the initial issuance of 19 December 2018. The Transaction is currently in its Revolving Period which will end on the earlier of 20 April 2020 and the breach of an Excess Spread or Cumulative Non-Performing Loan (“NPL”) trigger. Until such Excess Spread or Cumulative NPL Trigger is breached, the Notes are amortised on a pari passu and pro rata basis. The breach of either of these triggers would cause the Notes to begin to amortise sequentially. None of the before-mentioned performance triggers had been breached as at 30 June 2019.
The Issuer plans to pre-fund 4.6% (c.R29.8m) of the combined notes (i.e., the already issued notes of R500m and the planned New Issuance of R150m). The pre-funding amount may be used by the Issuer to acquire additional assets during the Revolving Period. Risk of negative carry is mitigated given the small pre-funding amount relative to the asset portfolio, and existing excess spread and excess spread trigger.
The asset portfolio continues to present obligor and geographic concentrations, however the natural amortisation of the portfolio has reduced concentrations slightly. The acquisition of assets must comply with the eligibility criteria and portfolio covenants, which mitigate the risk of a significant change in the composition of the asset portfolio during the Revolving Period.
The Transaction’s portfolio covenants have been maintained within their respective limits as at June 2019. The WA Seasoning was reported at 44.96 months (minimum of 40 months), the WA Margin above Prime was reported at 3.51% (minimum of 3.25%) and the WA Current Loan to Value ratio was reported at 53.40% (maximum of 58.50%). Each of the before-mentioned covenants must be complied with immediately following the acquisition of Mortgage Loans by the Issuer.
GCR used a hybrid cash flow modelling approach, combining elements of both its Criteria for Rating Consumer Asset Backed Securities and its Criteria for Rating Residential Mortgage Backed Securities to rate the Transaction.
GCR updated its calculations of cumulative base case default, cumulative recovery and prepayment rates using the latest information provided by the Servicer. At inception of the Transaction, GCR calculated an adjusted base case default rate of 12.92% which was based on historical defaults incurred by the Originator on its total loan book. The latest default rates lead to a lower calculated base case. However, GCR conservatively maintained the previous base case default rate and adjusted it by 1.25 times the accounts in arrears (5.2%) to derive an adjusted default rate of 13.09%. GCR applied the marginal decrease of the adjusted base case recovery rate implied by its incorporation of recent data, specifically, latest property values, from 81.00% to 80.72%. GCR recalculated prepayment rates, which are inclusive of the 2019 financial year results, and revised the base case prepayment rate upwards from 10.61% to 11.55%.
|Primary analyst||Corné Els||Senior Structured Finance & Securitisation Analyst|
|Johannesburg, ZA||CorneE@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Vuyisile Madlebe||Structured Finance & Securitisation Analyst|
|Johannesburg, ZA||VuyisileM@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, updated September 2018|
|Criteria for Rating Consumer Asset Backed Securities, updated September 2018|
|Criteria for Rating Residential Mortgage Backed Securities, updated November 2018|
|Criteria for Rating Financial Institutions, May 2019|
|TUHF Urban Finance (RF) Ltd Ratings Announcement, December 2018|
|Standard Bank of South Africa Ltd Financial Institution Rating Report, May 2018|
|Trust for Urban Housing Finance Ltd Ratings Announcement, September 2019|
TUHF Urban Finance (RF) Ltd
|Security class||Stock code||Review||Rating scale||Rating class||Outlook||Date|
|Class A1 Notes||TU1A11||Initial||National||AA-(ZA)(sf)||Stable||Dec. 2018|
|Class A1 Notes||TU1A12||Initial||National||AA-(ZA)(sf)(IR)||Stable||Sep. 2019|
|Class B Notes||TU1B11||Initial||National||BBB-(ZA)(sf)||Stable||Dec. 2018|
|Class B Notes||TU1B12||Initial||National||BBB-(ZA)(sf)(IR)||Stable||Sep. 2019|
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT
|Account Bank||A bank where the transaction account is held.|
|Advance||A lending term, to transfer funds from the creditor to the debtor.|
|Affirmation||See GCR Rating Scales, Symbols and Definitions.|
|Amortisation||From a liability perspective, the paying off of debt in a series of instalments over a period of time. From an asset perspective, the spreading of capital expenses for intangible assets over a specific period of time (usually over the asset’s useful life).|
|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.|
|Asset/Assets||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 Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Claim||1. A request for payment of a loss, which may come under the terms of an insurance contract (insurance). 2. A formal request or demand (corporate finance).|
|Concentrations||A high degree of positive correlation between factors or excessive exposure to a single factor that share similar demographics or financial instrument or specific sector or specific industry or specific markets.|
|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 Enhancement||Limited protection to a transaction against losses arising from the assets. The credit enhancement can be either internal or external. Internal credit enhancement may include: Subordination; over-collateralisation; excess spread; security package; arrears reserve; reserve fund and hedging. External credit enhancement may include: Guarantees; Letters of Credit and hedging.|
|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|
|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.|
|Eligibility Criteria||Limitations imposed on the type and quality of assets that can be sold by the Originator / Servicer into the Securitisation vehicle which ensure the transaction will track the performance of historical data analysed as closely as possible.|
|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 Year||The year used for accounting purposes by a company or government. It can be a calendar year or it can cover a different period, often starting in April, July or October. It can also be referred to as the fiscal year.|
|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.|
|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.|
|Lien||A right of retention of someone else’s property due to expensed money or labour on property acquires a lien until payment is made. A lien outranks all other forms of security claims. A lien arises by operation of law and not as agreement between parties. There are three types of liens: 1.) Storage or salvation of property; 2.) Improvement of property; and 3.) Contractual debt.|
|Loan To Value||Principal balance of a loan divided by the value of the property that it funds. LTVs can be computed as the loan balance to most recent property market value, or relative to the original property market value.|
|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.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Mortgage Loan||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.|
|Obligation||The title given to the legal relationship that exists between parties to an agreement when they acquire personal rights against each other for entitlement to perform.|
|Obligor||The party indebted or the person making repayments for its borrowings.|
|Originator||An entity that created assets and hold on balance sheet for securitisation purposes.|
|Pari Passu||Side by side; at the same rate or on an equal footing. Securities issued with a pari passu clause have rights and privileges that are equivalent to those of existing securities of the same class.|
|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.|
|Pricing||A process of determining the price of a debt security.|
|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.|
|Property||Movable or immovable asset.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Recovery||The action or process of regaining possession or control of something lost. To recoup losses.|
|Redemption||The repurchase of a bond at maturity by the issuer.|
|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.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Seasoning||The age of an asset, the time period passed since origination.|
|Securities||Various instruments used in the capital market to raise funds.|
|Securitisation||A process of repackaging portfolios of cash-flow producing financial instruments into securities for sale to third parties.|
|Security||One of various instruments used in the capital market to raise funds.|
|Servicer||A transaction appointed agent that performs the servicing of mortgage loans, loan or obligations.|
|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.|
|Surveillance||Process of monitoring a transaction according to triggers, covenants and key performance indicators.|
|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.|
|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.|
|Weighted||The weight that a single obligation has in relation to the aggregated pool of obligations. For example, a single mortgage principal balance divided by the aggregated mortgage pool principal balance.|
|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 were 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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings are for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
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 face-to-face 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 rating included:
- Draft Applicable Pricing Supplements of the TU1A12, TU1B12, TU1D12 and TU1E2U Notes;
- TUHF Default and Recovery Data up to June 2019;
- TUHF Prepayment up to 31 March 2019;
- TUHF Urban Finance (RF) Ltd Investor Report of 30 April 2019 and July 2019.