Announcements Rating Alerts Structured Finance

GCR assigns public ratings to the Notes issued by Fox Street 3 (RF) Limited

Rating Action

Johannesburg, 13 October 2021 – GCR Ratings (“GCR”) has assigned national scale long-term issue credit ratings to the following Classes of Notes issued by Fox Street 3 (RF) Limited (“Fox Street 3”, the “Transaction” or “the Issuer”) on 13 October 2021.

Security Class Stock Code Issuance Amount Rating Class Rating Scale Rating Outlook
Class A1 FST3A1 R80,000,000 Long Term Issue National AAA(ZA)(sf) Stable
Class A2 FST3A2 R165,000,000 Long Term Issue National AAA(ZA)(sf) Stable
Class A3 FST3A3 R445,000,000 Long Term Issue National AAA(ZA)(sf) Stable
Class A4 FST3A4 R260,000,000 Long Term Issue National AAA(ZA)(sf) Stable

GCR modelled the Transaction with its Subordinated Loan of R151.2m, which is unrated.

The credit ratings accorded to the Class A Notes relate to timely payment of interest and ultimate payment of 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.

Rating Rationale

Fox Street 3 is a Residential Mortgage Backed Securities (“RMBS”) securitisation of home loans originated by Investec Bank Limited (“Investec”) to its private banking clients. Fox Street 3 issued R950m of secured Notes in October 2021 with a possibility of future tap issuances. Seven other similar Fox Street RMBS transactions have been in existence. The transaction documentation of Fox Street 3 has been amended, essentially to align Fox Street 3’s structure with that of Fox Street 7 (RF) Ltd, the most recent Fox Street transaction to issue Notes.

The Issuer may use the proceeds of the issuance to (a) buy out the existing Notes of Fox Street 3, which are currently backed by the pool of Existing Participating Assets, and (b) purchase additional Participating Assets from Investec and from other Approved Sellers – including Fox Street 1 (RF) Limited and Fox Street 2 (RF) Limited. The Subordinated Loan will fund the transaction reserves to the required level, as well as the Existing Participating Assets that do not meet the Eligibility Criteria set under the Transaction documents.

GCR modelled the Transaction’s cash flows according to the capital structure and priorities of payments, applying its Criteria for Rating Structured Finance Transactions, September 2018 and Criteria for Rating Residential Mortgage Backed Securities, November 2018. Fox Street 3’s asset portfolio was modelled based on the earmarked pool with a Cut-Off Date of 31 July 2021 provided to GCR. Defaults, recoveries, prepayments and arrears were modelled according to GCR’s standard RMBS methodology and assumptions.

The purchase and transfer of the home loans from the Approved Sellers, stated above, will take place over the Asset Acquisition Pre-Funding Period, which ends on 13 April 2022.

In the interim, the proceeds are housed as cash in the Capital Reserve and any such cash not utilised for the purchase of home loans by at the end of the Pre-Funding Period will become Principal Available Funds and applied in accordance with the Pre-Enforcement Principal Priority of Payments, towards, inter alia, the redemption of Notes.

The final rating outcome is a direct result of the modelling of the Transaction’s cash flows in specific rating scenarios, whereby all Notes are paid in full and is detailed further in the Rating Analysis section of the Fox Street 3 (RF) Limited Rating Report published by GCR in conjunction with this Rating Announcement.

Transaction Strengths

  • The Transaction begins amortising from its inception, which implies a static asset portfolio (barring further advances), and a proportionate potential build-up of credit enhancement as the Notes amortise.
  • The underlying portfolio of assets is of very high credit quality and historically has yielded few defaults and high recoveries. The assets are well seasoned, approximately 66% of the assets have been held in Fox Street 3 (RF) Limited and 28.3% in Fox Street 1 (RF) Limited and Fox Street 2 (RF) Limited combined and the remaining 5.7% of assets are acquired from Investec’s balance sheet.
  • The Principal Deficiency Ledger mechanism provides early credit protection by directing excess interest earned towards redemption of Notes in proportion to defaults occurring on the underlying asset portfolio.

Transaction Weaknesses

  • The underlying assets show high historical prepayment behaviour, whose effect may be mitigated by high redraws, may impact the revenue generated by the asset portfolio as modelled by GCR and introduce term volatility.
  • The combined pool includes loans that do not have a clean payment record history and do not meet the Eligibility Criteria. However, this has been mitigated by the funding provided by the Subordinated Loan for these loans, implying that they act as overcollateralisation.

Analytical Contacts

Primary Analyst Kefilwe Thubisi Structured Finance and Securitisation Analyst
Johannesburg, ZA kefilwet@GCRratings.com +27 11 784 1771
Secondary Analyst Yehuda Markovitz Structured Finance and Securitisation Analyst
Johannesburg, ZA yehudam@GCRratings.com +27 11 784 1771
Committee Chair Yohan Assous Sector head: Structured Finance and Securitisation
Johannesburg, ZA yohan@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for Rating Structured Finance Transactions – September 2018
Criteria for Rating Residential Mortgage-Backed Securities – November 2018
Criteria for the GCR Ratings Framework – May 2019
Investec Bank Limited Financial Institution Report – July 2021
Criteria for Rating Financial Institutions, May 2019
Ratings Scales, Symbols and Definitions – May 2019

Glossary of Terms/Acronyms

Advance A lending term, to transfer funds from the creditor to the debtor.
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 A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Assets A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Audit Report A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).
Capital The sum of money that is invested to generate proceeds.
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.
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.
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.
Facility The grant of availability of money at some future date in return for a fee.
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.
Pool An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.
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 Any unscheduled or early repayment of the principal of a mortgage/loan.
Principal The total amount borrowed or lent, e.g., the face value of a bond, excluding interest.
Private An issuance of securities without market participation, however, with a select few investors. Placed on a private basis and not in the open market.
Proceeds Funds from issuance of debt securities or sale of assets.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Redemption The repurchase of a bond at maturity by the issuer.
Refinance The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.
Repayment Payment made to honour obligations in regard 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.
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.
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.
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.
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.
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, 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.

Investec participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Investec and other reliable third parties to accord the credit rating included:

  • Earmarked pool cut dated 31 July 2021
  • Final capital structure
  • Historical performance data (including arrears, defaults and prepayments)
  • Final Transaction documentation, including:
  • Programme Memorandum
  • Memoranda of Incorporation of Issuer and Security SPV
  • Indemnity
  • Account Bank Agreement
  • Administration Agreement
  • Common Terms Agreement
  • Deeds of Cession and Pledge
  • Guaranteed Investment Contract
  • Deed of Suretyship
  • Guarantee
  • Warehouse Facility Agreement
  • Pre-Issue Sale Agreement
  • Sale Agreement
  • Servicing Agreement
  • Subordinated Loan Agreement
  • ISDA CSA Master Agreement
  • ISDA CSA Schedule
  • ISDA CSA Annexure
  • ISDA Schedule
  • Applicable Pricing Supplements
  • Final Signed Legal and Tax Opinion
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