Rating Action
Johannesburg, 29 November 2021 – GCR Ratings (“GCR”) has downgraded the following national scale long term issue credit rating for the Notes issued by AB Finco 1 (RF) Limited (“AB Finco 1” or the “Issuer”) under its Series 7.
| Transaction | Stock Code | Amount | Rating Class | Rating | Outlook |
| Series 7 | ABF007 | R2.09bn | Long Term Issue | A(ZA)(sf) | Negative |
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 Notes are 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.
The downgrade by GCR of the rating of the Notes issued under Series 7 follows Moody’s downgrade of Transnet SOC Ltd’s rating on the 3 November 2021 from Aa2.za to A2.za. Given the credit linkage between Transnet’s and the Notes’ ratings, the latter was adjusted accordingly.
Transnet breached its Cash Interest Coverage Ratio for the period ending March 2021, which constituted an Event of Default. GCR was provided with a waiver letter for the covenant breach. In addition, Transnet received a qualified audit opinion of its Annual Financial Statements for the year ended March 2021, which also constitutes an Event of Default and is waiting on a waiver letter for the qualified opinion.
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. Therefore, 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.
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 are to be been reserved in the structure to cater for expected expenses.
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
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 | Oct 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 | Oct 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 | Oct 2021 |
AB Finco 1 (RF) Ltd – Series 5 Notes (eThekwini)
| Rating class | Review | Rating scale | Rating | Outlook | Date |
| Long Term issuer | Initial & Last | National | AA+(ZA)(sf) | Positive | Oct 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 | Oct 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 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 Absa CIB. The ratings were 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 September 2021;
- Transnet Compliance Certificate for the period ending March 31st 2021; and
- Conditional Waiver Letter.