Johannesburg, 06 September 2016 — Global Credit Ratings has upgraded Trust for Urban Housing Finance’s (TUHF Group) national scale long term rating to BBB(ZA) and affirmed its short term rating of A3(ZA); with the outlook accorded as Stable. Furthermore, GCR has affirmed the international scale rating assigned to Trust for Urban Housing Finance (TUHF Group) of BB-; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to TUHF Group based on the following key criteria:
The ratings reflect entrenchment of TUHF Group (“the group”) in inner-city mortgage finance, together with its sustainable operating model, clear strategy, strengthening risk/operational practices, increased geographic spread, and support from an increasingly diversified equity and funding partner base.
The finalisation of a R200m grant by National Treasury’s Jobs Fund, which is to be used as a catalyst for raising an additional R800m in listed bonds through a Domestic Medium Term Note (“DMTN”) Programme, has bolstered TUHF Group’s medium-term growth trajectory. During F16, TUHF Group concluded all the Jobs Fund related funding agreements, received R87.5m in grant funding, and is far advanced with the launch of its maiden R280m issue of senior secured debt under its R1.0bn DMTN programme, which is JSE approved, and is expected to close during September 2016.
Net loans rose 4.9% in F16 (F15: 8.1%), driving total operating income growth of 11.9% to R120m (F15: 14.5%). Pre-tax profit moderated to R35m (F15: R44m) largely as a result of higher operating expenses associated with regional expansion, implementation of new operations/treasury management systems, and reporting in support of grant requirements. Slower loan growth (due to funding constraints), slightly lower interest margins and a higher cost base reduced TUHF Group’s internal capital generation, but the injection of grant funding (Tier 2 capital) boosted the capital/assets ratio to 15.3% (FYE15: 11.3%), against a long-term target of 10%, which GCR deems adequate in light of business composition and risk.
Asset performance is generally considered to be strong. While past due loans were 8.8% of gross loans at FYE16 (FYE15: 8.0%), credit losses have remained in the 0.6-0.8% range, given the adequacy of provisioning, and the significant quantum, quality and perfectibility of collateral in place.
Liquidity risk has remained stable/modest. Rising short-term mismatches associated with the shorter tenor of new funding is expected to be mitigated by enhanced treasury/funding management sophistication. Future funding choices may raise exposure to interest rate and/or currency risk, but are likely to be hedged.
Maintenance of the group’s financial performance, asset quality and financial profile, together with significant increases in scale, strategic implementation and funding diversification could have a positive impact on the ratings. However, deteriorating asset quality, unmanaged liquidity risk, looser credit policies, and/or un-remedied covenant breaches could result in downward rating action.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2013)||Initial rating (September 2013)|
|Long term: BBB-(ZA); Short term: A3(ZA)||Long term: BB|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2015)||Last rating (December 2015)|
|Long term: BBB-(ZA); Short term: A3(ZA)||Long term: BB-|
|Outlook: Positive||Outlook: Stable|
|Sector Head: Financial Institution Ratings|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
Global Criteria for Rating Finance and Leasing Companies, updated March 2016
TUHF Group rating reports (2013-15)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES 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 credit rating document.
Trust for Urban Housing Finance (TUHF Group) 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 credit rating/s has been disclosed to Trust for Urban Housing Finance (TUHF Group) with no contestation of the rating.
The information received from Trust for Urban Housing Finance (TUHF Group) and other reliable third parties to accord the credit rating(s) included:
- Financial results of TUHF Group to 31 March 2016 (plus four years of audited comparative numbers);
- Management accounts of TUHF Group to 30 June 2016;
- Latest internal and/or external audit reports to management;
- A breakdown of facilities available and related counterparties; and
- Corporate governance and enterprise risk framework.
The ratings above were solicited by, or on behalf of, Trust for Urban Housing Finance (TUHF Group), and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|Capital||The sum of money that is invested to generate proceeds.|
|Collateral||Asset provided to a creditor as security for a loan.|
|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 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.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|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.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|Hedge||A risk management technique used to reduce the possibility of loss resulting from adverse movements in commodity prices, equity prices, interest rates or exchange rates arising from normal banking operations. Most often, the hedge involves the use of a financial instrument or derivative such as a forward, future, option or swap. Hedging may prove to be ineffective in reducing the possibility of loss as a result of, inter alia, breakdowns in observed correlations between instruments, or markets or currencies and other market rates.|
|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.|
|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.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|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.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|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.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Senior Secured Debt||Secured Debt that is paid first in the event of a default.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Tenor||The time from the value date until the expiry date of a financial instrument.|
For a detailed glossary of terms utilised in this announcement please click here
GCR upgrades Trust for Urban Housing Finance’s (TUHF Group) rating to BBB(ZA); Outlook Stable.