Announcements

MW Asset Rentals (RF) Ltd – New Ratings Accorded

Johannesburg, 12 December 2017 — Global Credit Ratings (“GCR”) has accorded the following indicative, public long-term credit ratings to the following Notes issued by MW Asset Rentals (RF) Ltd (the “Issuer”) (the “Transaction”) on 18 November 2016:

Secured Class A Notes, stock code MWAR01;
R450,000,000;
AAA(ZA)(sf)
Stable Outlook.

GCR concurrently accorded the following indicative, public long-term credit ratings to the following Notes to be issued by the Issuer on or about 31 January 2018 (“New Issuance”):

Secured Class A Notes, stock code TBD;
R300,000,000;
AAA(ZA)(sf)
Stable Outlook.

The Issuer had a Subordinated Loan of R44,645,000 that is unrated and held by Merchant West (Pty) Ltd, which may be increased to R64,645,000 following the New Issuance.

The indicative, public 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.

These ratings are scheduled to expire on 12 February 2018.

RATING RATIONALE

MW Asset Rentals (RF) Ltd is a R2.5bn Lease Receivables Backed Note Programme that issued R450m of Class A Notes on 18 November 2016. The Issuer indicated that a further R300m of new Class A Notes may be issued during January 2018.

The key covenant of this Transaction is the Asset Cover Ratio that has to be maintained above 1.25x. The covenant limit will be revised upwards to 1.28x for the Class A Notes. Although the covenant has been historically maintained at higher levels, GCR has only considered its minimum contractual level for the purpose of its rating analysis. GCR modelled the structure both with and without the New Issuance to be able to accord a rating to the existing Notes. GCR noted that a scenario without the New Issuance was more punitive to the cash flows that were modelled. This is due to the increased impact of fixed costs on a smaller asset portfolio and due to the dilution of existing defaults caused by the addition of new assets in the case of a New Issuance. For the purpose of the indicative ratings and given that the New Issuance has not occurred as yet, GCR retained the conclusions of the cash flow model in a scenario without the New Issuance.

The Transaction has a Liquidity Reserve, Capital Reserve and Arrears Reserve – all being maintained at their required limits since November 2016. The Liquidity Reserve may be utilised to fund payments of Liquidity Shortfalls. Only the Liquidity Reserve and Arrears Reserve have been taken into account for credit enhancement to the Class A Notes. The Capital Reserve may be utilised to purchase Additional Participating Assets & to fund the redemption of Notes and shall be maintained at 5% of the Principal Amount Outstanding during the Revolving Period. The Arrears Reserve will be utilised to provide for Non-Performing Leases (“NPLs”) during the Revolving Period and the Arrears Reserve Required Amount in an amount equal to 50% of the aggregate Exposure to NPLs.

All receipts in respect of the Participating Assets and existing Assets held by the Seller are comingled in the Collections account which is administered by the Servicer on behalf of the Collections SPV, a bankruptcy remote entity. Any disbursements from the Collections SPV are made towards the Issuer’s Transaction Account, held at Nedbank Ltd, within two business days, therefore minimising comingling risk.

The Originator, Seller and Servicer are Merchant West (Pty) Ltd, an asset-backed financier that offers tailored finance structured for finance leases, operating lease rentals, full maintenance leasing of office automation, ITC equipment, yellow metal equipment, vehicles, trucks and aviation to the public and corporate sector. Merchant West reported market comparable defaults, albeit non-granular. However, high to full recoveries are usually realised within the first 24 months.

The August 2017 portfolio consisted of a variety of assets with concentrations towards Office Equipment and IT Equipment (37.2%), Commercial and Agriculture (16.4%) and Mining/Construction (15.0%). Non-Government client leases are deemed non-performing if they are in arrears for more than 90 days, whist Government client leases are deemed non-performing if they are in arrears for more than 150 days. The Issuer reported R8.1m (1.32%) of bad debts as at August 2017.

RATINGS HISTORY

Security class
Stock code
Initial & Last Rating
Long-term Rating
Short-term Rating
Outlook
Secured Class A Notes
MWAR01
12 December 2017
AAA(ZA)(sf)
n.a
Stable
Secured Class A Notes (New Issuance)
TBD
12 December 2017
AAA(ZA)(sf)
n.a
Stable
 

ANALYTICAL CONTACTS

Primary Analyst

Corné Els

Senior Structured Finance Analyst

+27 11 784 1771

CorneE@globalratings.net

Secondary Analyst

Mark Vrdoljak

Senior Structured Finance Analyst

markvrd@globalratings.net

Committee Chairman

Yohan Assous

Sector Head: Structured Finance Ratings

+27 11 784 1771

yohan@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Structured Finance Rating Criteria – Feb ’17,

Consumer Asset Backed Securitisation Rating Criteria – May ’17,

Global Master Criteria for Rating Banks and Other Financial Institutions – Mar ’17, and

Nedbank Ltd Financial Institution Rating Report – May ’17.

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/RATING-SCALES-DEFINITIONS. 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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S STRUCTURED FINANCE GLOSSARY

Arrears General term for non-performing obligations, i.e. obligations that are overdue.
Arrears Reserve An accounting provision made in a reserve fund for arrears.
Asset An item with economic value that an entity owns or controls.
Bad Debt A bad debt is an amount owed by a debtor that is unlikely to be paid when due, for example, to a company going into liquidation. This typically refers to default rather than delinquency.
Capital The sum of money that is used to generate proceeds.
Concentrations A high degree of positive correlation between factors or excessive exposure to a single factor that share similar demographics or financial instrument or specific sector or specific industry or specific markets.
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 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
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.
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.
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.
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.
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.
Issuer The party indebted or the person making repayments for its borrowings.
Lease Agreement or temporary use and enjoyment of a corporeal thing (movable or immovable property) the whole or part thereof for rent. The essential elements of a contract of lease are: 1.) Undertaking of lessor to give the lessee the use and enjoyment of something; 2.) Agreement between the lessor and lessee that the lessee’s right to use and enjoyment is temporary; and 3.) Lessee’s undertaking to pay a sum or rent.
Liquidity The ability to repay short-term obligations or short-term availability of liquid assets to a market or entity.

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.
Long-Term Rating A 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.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Operating Lease A lease where the risk and reward is not transferred.
Originator An entity that created assets and hold on balance sheet for securitisation purposes.
Performing An obligation that performs according to its contractual obligations.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
Receivables General term for economic benefit derived from an asset.
Recovery The action or process of regaining possession or control of something lost. To recoup losses.
Redemption The repurchase of a bond at maturity by the issuer.
Rent Payment from a lessee to the lessor for the temporary use of an asset.
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.
Servicer A transaction appointed agent that performs the servicing of mortgage loans, loan or obligations.
Short-Term Rating A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.
Stock Code A unique code allocated to a publicly listed security.
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.

For a detailed glossary of terms utilised in this document please click here.


SALIENT FEATURES 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, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit ratings document.

The Arranger participated in the rating process via face-to-face meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings have been disclosed to the Arranger with no contestation of the ratings.

GCR has received the Programme Memorandum, Note Subscription Agreement, Applicable Pricing Supplement (MWAR01), Sale Agreement, Servicing Agreement, Administration and Agency Agreement, Subordinated Loan Agreement, Account Bank Agreement, Preference Share Subscription Agreement, Preference Share Certificate, Common Terms Agreement, Settlement and Services Agreement, Security SPV Guarantee, Issuer Indemnity, Security Cession, Issuer Owner Trust Guarantee, Issuer Owner Trust Cession and Pledge, Security SPV Owner Trust Deed, Collections SPV Trust Deed, Collections SPV Administration Agreement.

The ratings above were solicited by, or on behalf of the rated client, and therefore, GCR has been compensated for the provision of the ratings.

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