Johannesburg, 27 June 2019 – GCR Ratings (“GCR”) has lowered the national scale fund rating* assigned to Southchester RF Limited (“Southchester”, “the fund”) from AA(ZA)(f) to AA-(ZA)(f), key features of which are summarised below.
|Rated Entity||Rating class||Rating scale||Rating||Outlook / Watch|
|Southchester RF Limited||Fund||National||AA-(ZA)(f)||Stable Outlook|
|Fund currency||South African Rand|
|Fund data review date||30 April 2019|
|Assets under management (“AUM”)||R3.53bn|
|Net asset value (“NAV”)||Market value (variable NAV)|
|Fund benchmark||South African Benchmark Overnight Rate (“SABOR”)|
The fund rating on Southchester reflects its fairly broad mandate, balancing good asset quality, high asset concentration, good liquidity, high funding concentration, and a relatively high spread risk but with better capital preservation. Southchester is a public limited liability company that issues senior debt instruments (including subordinated debt from the previous structure) to investors primarily institutional and invests in money market assets. As such, the entity is exposed to different regulatory oversight than traditional funds. At the time of review, subordinated debentures had been redeemed and a total of R103m issued as equity. This leaves all remaining debenture units in the fund ranking pari passu.
Portfolio quality: The portfolio’s weighted average credit rating (“WACR”) of AA(ZA) is considered to be strong, although its exposed to high issuer/counterparty concentrations. This concentration is a common feature in most South African money market funds because mandates typically limit the investment universe to top tier banks and government backed instruments, and the structure of South Africa’s banking sector is oligopolistic. Positively, the top tier banks in South Africa are typically of strong quality and well regulated.
Liquidity risk: Liquidity is a negative rating factor, balancing the risks of high funding concentration, long maturity, and good liquidity of portfolio instruments that are senior ranking obligations of high credit quality issuers. At 30 April 2019, top 5 investors (out of a total of 60) contributed 81% of total portfolio investments. Redemptions are satisfied through sale of assets held overnight (accounting for 27% of portfolio assets) and utilisation of repurchase agreements (“repos”) on longer maturity assets. The fund’s reliance on repos for short term liquidity is viewed negatively. However, in a market-wide liquidity stress scenario, non-overnight assets are dematerialised on electronic trading system STRATE, effectively achieving a proportional distribution of portfolio assets to the investor. Therefore, we adjust the WACR downwards by one notch for said liquidity risk.
Market risk and performance: The fund has a fairly broad investment mandate that allows longer maturity instruments although limiting the transmission of market volatility into the portfolio, as measured by tenor/duration. As a result, spread risk in this fund is relatively high. However, it is worth noting that this fund has better capital preservation in comparison to some unit trust money market funds. This is because of its legal structure as a public company it holds equity that provides credit enhancement to the structure. The equity buffer is considered adequate to absorb any mark to market losses incurred in the event an asset has to be sold before its maturity. Capital preservation is also supported by returns that continue to exceed benchmark within duration constrains.
Manager track record: We view the manager to possess the competence, capability and capacity to manage the fund based on skills and experience of portfolio managers. In addition, adequate compliance and risk management systems aim to meet performance objectives within mandate constraints.
* Fund ratings provide an opinion regarding the fund’s ability to preserve principal value under varying market conditions; with reference to the relevant asset management environment (refer to published rating scales and definitions).
The Stable Outlook reflects GCR’s expectation of no changes to the mandate and that the fund will continue to invest accordingly.
An increase in the WACR, reduction in funding concentrations, strengthening equity buffer, and growth in AUM is positive for the fund rating. A negative rating action would be taken if there is a decrease in WACR, deterioration in capital and liquidity and/or changes to mandate which we view to be negative.
|Primary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||SimbarakeC@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Sector head: Financial Institution Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related criteria and research
|Global Master Criteria for Rating Funds and Asset Managers, March 2018|
|Rated Entity||Review||Date||Rating class||Rating scale||Rating||Outlook / Watch|
|Southchester RF Limited||Initial||2017-09-30||Fund||National||AA(ZA)(f)||Stable Outlook|
|Compound Annual Growth Rate (CAGR)||The year on year percentage growth rate of an investment over a given period of time. It is found by calculating:|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|Institutional Investors||Financial institutions such as pension funds, asset managers and insurance companies, which invest large amounts in financial markets on behalf of their clients.|
|Interest Rate Risk||Interest rate risk in the banking book is the risk that earnings or economic value will decline as a result of changes in interest rates. The sources of interest rate risk in the banking book are repricing/mismatch, basis and yield curve risk.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|National Scale Rating||Provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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.|
|Rating Outlook||Indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Tenor||The time from the value date until the expiry date of a financial instrument.|
|Trustee||A person or firm that holds or administers property or assets for the benefit of a third party.|
|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 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, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable fund rating document.
The fund rating has been disclosed to Southchester RF Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Southchester RF Limited participated in the rating process via face-to-face management meetings, 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 Southchester RF Limited and other reliable third parties to accord the fund rating included:
- A breakdown of the fund investment portfolio, including information on the instruments, their terms, conditions and credit quality;
- A breakdown of the fund investor portfolio, including fund flows and withdrawal terms;
- Detail on historical fund returns, fee structures, and expense ratios;
- Details regarding the fund management, investment management and administration activities of the fund;
- Corporate governance and enterprise risk framework; and
- Industry comparative data and regulatory framework.