Johannesburg, 21 September 2021 – GCR Ratings (“GCR”) has assigned the following short-term issue credit rating to the following Notes that were issued by AB Finco 2 (RF) Limited on 9 September 2021:
|Security Class||Stock Code||Amount||Rating Class||Rating Scale||Rating||Final Redemption Date|
|Class A||AF102U||R1,400,000,000||Short-term issue||National||A1+(ZA)(sf)||September 2022|
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.
The credit rating of the Notes is linked to the credit ratings of Absa Bank Limited (“Absa Bank”). A change of the short-term national scale credit rating of Absa Bank may lead to a change of the credit rating of the Notes. The rationale for this linkage is explained further in this announcement.
AB Finco 2 (RF) Limited (the “Issuer”) issued R1.4bn of Notes under the AB Finco Multi-Issuer Note Programme, administered by Absa Corporate and Investment Banking (“Absa CIB”) on 9 September 2021. The Notes were issued under the first Transaction (“Transaction 1”) entered into by the Issuer, which is, in turn, the second Issuer to issue Notes under the Multi-Issuer Notes Programme. As such, the Terms and Conditions of the Multi-Issuer Programme apply, including the Priority of Payments.
This issuance is the second Series of Notes to be issued under Transaction 1. The R1.5bn of Notes of Series 1 were fully redeemed at maturity on the same date as the Series 2 issuance (9 September 2021). As a result, their rating ceased to exist. The structure of Series 2 is the same as that of Series 1.
The Issuer used the proceeds of the issuance to acquire Participating Assets (being Government Bonds). A typical security structure is in place, whereby AB Finco 2 Security SPV has executed a limited recourse Guarantee in favour of the Noteholders and the Issuer has indemnified the Security SPV in respect of claims that can be made under the Guarantee. The Issuer has granted a cession in security over the Assets to the Security SPV as security for the Indemnity.
Additionally, as for Transaction 1 Series 1, Transaction 2 and Transaction 3, the Issuer has entered into a master bond Total Return Swap (“TRS”) confirmation agreement with Absa CIB as Derivative Counterparty. Under the TRS, the Issuer swaps 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 of the Participating Assets as at Notes Issue Date and their final price as at TRS termination, 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.
Furthermore, 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, with the Credit Support Minimum Transfer Amount set at R1m. The Derivative Counterparty is to post Credit Support in the form of Government Bonds to the Issuer when the price of the Participating Assets decreases, and the Issuer is to release Participating Assets as Credit Support to the Derivative Counterparty when the price of the Participating Assets increases compared to their initial price. In this way, the market value of Participating Assets held by the Issuer will be kept constant daily, to equal (roughly, within the Minimum Transfer Amount of R1m) 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 would also terminate upon 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 explicitly 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. However, 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. For the Transaction’s first quarter, the TRS Floating Rate less the Initial Interest Rate paid by the Issuer on the Notes is equal to 0.04%.
GCR has received a schedule of projected Senior Expenses that the Issuer will 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 and a 20% modelled increase in costs for the third and fourth quarters), noting, however, that a portion of ongoing Expenses that relate to the Transaction is not intended to be carried by the Issuer. Rather, as discussed further below, the relevant counterpart(y/ies) to which this portion of Expenses is due will invoice Absa Bank on a continuous basis, at which time Absa Bank intends to pay these Expenses.
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. These 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 whatever Senior Expenses the Issuer determines it will need to pay over the upcoming quarter secures the adequacy of the new TRS Floating Rate that may be offered by a replacement Derivative Counterparty. As such, in GCR’s assessment, there is no dependency on the current Derivative Counterparty that might introduce a credit linkage thereto.
The fact that Absa Bank will pay a portion of the costs that relate to the Transaction on a continuous basis has been taken into consideration by GCR. The Interest Rate Adjustment mechanism should, in most foreseeable scenarios, ensure that sufficient funds are received by the Issuer in terms of the TRS to provide for repayment in full of Notes interest and principal even in the event of Absa Bank’s ceasing to cover the costs it currently covers. GCR understands that, in terms of the current arrangement, it is mainly the cost of the corporate administration services provided by Maitland Outsourced Securitisation Services (Pty) Ltd (“Maitland”) that is being covered by Absa Bank under an agreement directly between Absa Bank and Maitland. Under this arrangement, should Absa Bank not make a payment that it agreed to make to Maitland for services already provided to the Transaction, Maitland will have no recourse to the Issuer to claim payment. Should Absa Bank end its coverage of this cost, the Issuer will need to include the cost in its Determination and propose a Notes Interest Rate Adjustment accordingly, which if not accepted by a Noteholder would lead to TRS termination and Notes redemption, for which sufficient funds are expected to be available through the TRS Total Return Amount as described above. Nevertheless, some degree of uncertainty exists as to whether payments due on the Notes might be compromised should Absa Bank no longer be able to support the Transaction since the Transaction depends on the continuous provision of corporate services. An additional risk involves the possibility of Absa Bank taking on further costs in future, in addition to that of the corporate administration services provided by Maitland.
In consideration of the subsidisation of a portion of the Transaction’s costs by Absa Bank and the substance of the Transaction as being interconnected with Absa Bank as described above, the Notes have been accorded a short-term national scale issue credit rating of A1+(ZA)(sf), commensurate with the A1+(ZA) short-term national scale credit rating of Absa Bank. GCR takes note of the various provisions that mitigate the perceived credit linkage to Absa Bank and therefore a change of the short-term national scale credit rating of Absa Bank may not necessarily lead to a change of the credit rating of the Notes. Rather, GCR would analyse the relevant factors at that time.
|Primary Analyst||Yehuda Markovitz||Senior Structured Finance Analyst|
|Johannesburg, ZA||yehudam@GCRratings.com||+27 11 784 1771|
|Secondary Analyst||Kyle Bales||Structured Finance Analyst|
|Johannesburg, ZA||KyleB@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
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.|
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.
Information received from Absa Bank Limited to accord the credit ratings includes:
- Transaction Documents,
- Cost Model, and
- Legal Opinion.