Johannesburg, 20 February 2017 — Global Credit Ratings (‘GCR’) has accorded an indicative, public short term credit rating of ‘A1(ZA)(sf)’ to the Senior Secured Debentures issued and to be issued by Southchester (RF) Limited (‘Southchester’ or the ‘Issuer’) from time to time under the Issuer’s R10bn hybrid Asset Backed Commercial Paper (‘ABCP’) Programme (the ‘Programme’). The indicative, public rating accorded relates to the timely payment of interest and principal.
Southchester is a hybrid ABCP Programme that advances Rand denominated Debentures. The Issuer may issue debentures, preference shares and/or other commercial paper (‘Debentures’). Senior Debentures will constitute senior, secured obligations of the Issuer, unless specified otherwise in the Applicable Pricing Supplement. The indicative, public rating accorded relates only to the Senior Secured Debentures with a maturity of not more than 365 days. Mezzanine Debenture holders are unsecured and rank below Senior Debenture holders but ahead of Junior Debenture holders. The Mezzanine and Junior Debentures will be issued to serve as second and first-loss credit enhancement facilities, respectively.
Proceeds of issuance of the Debentures will be invested in a portfolio of financial instruments and products (the ‘Portfolio’). The Portfolio is comprised of diversified short to medium term debt instruments and participatory interests in collective investment schemes which also primarily invest in similar debt instruments, in accordance with the Issuer’s Investment Policy. The Issuer’s Investment Policy is such that the Portfolio is highly liquid. Southchester’s performance is highly dependent on the ability of Peregrine Fund Platform (the ‘Administrator’) to service the Portfolio of Investments. GCR is comfortable that the Administrator can adequately manage this process.
Due to the relatively short dated and perceived liquid nature of the Portfolio, the Issuer has not entered into any committed liquidity facility agreements. However, the Issuer makes use of repurchase agreements and overdraft facilities for liquidity purposes. The repurchase agreements will be used to meet cash flow deficiencies arising from timing mismatches between the Issuer’s assets and liabilities. It should be noted that the liquidity is not intended to provide credit enhancement, nor to cover losses suffered by the Issuer.
GCR used its matrix approach as the underlying approach to determine if the credit enhancement provided in the Transaction was sufficient to support the indicative rating accorded to the Senior Secured Debentures. In terms of the matrix and the credit ratings of the underlying Investments as at 31 December 2016, the Issuer does not have adequate credit enhancement in place to support a rating of ‘A1+(ZA)(sf)’ on the Senior Secured Debentures. Nonetheless, the credit enhancement available is sufficient to support an ‘A1(ZA)(sf)’ rating on the Senior Secured Debentures.
It should be noted that even if credit enhancement available for the Transaction, together with the underlying Portfolio credit quality, warrants support for an ‘A1+(ZA)(sf)’ rating on the Senior Secured Debentures in the future, the lack of committed liquidity facilities effectively places a rating cap on the Senior Secured Debentures. As a result, GCR has accorded an indicative short term rating of ‘A1(ZA)(sf)’ to the Senior Secured Debentures issued and to be issued by the Issuer from time to time.
Southchester will be monitored and GCR will perform regular surveillance on the Programme.
For more information on the Programme, please refer to the “Southchester (RF) Limited – Pre-Funding Report” to be published on 20 February 2017. GCR analysed the Programme by applying its: Global Structured Finance Rating Criteria (Feb’16) and Global Asset Backed Commercial Paper Rating Criteria (Sep’16).
NATIONAL SCALE RATINGS HISTORY
Senior Credit Analyst
+27 11 784 1771
+27 11 784 1771
Sector Head: Structured Finance Ratings
+27 11 784 1771.
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
- Global Structured Finance Rating Criteria (Feb’16);
- Global Asset Backed Commercial Paper Rating Criteria (Sep’16);
RATING LIMITATIONS AND DISCLAIMERS
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|Administrator||A transaction appointed agent responsible for the managing of a Conduit or a Special Purpose Vehicle. The responsibilities may include maintaining the bank accounts, making payments and monitoring the transaction performance.|
|Advance||A lending term, to transfer funds from the creditor to the debtor.|
|Agent||An agreement where one party (agent) concludes a juristic act on behalf of the other (principal). The agent undertakes to perform a task or mandate on behalf of the principal.|
|Agreement||A negotiated and usually legally enforceable understanding between two or more legally competent parties.|
|Applicable Pricing Supplement||A transaction document that describes the particulars of notes issued.|
|Arranger||Usually an Investment bank that advises and constructs a transaction and acts as a conduit between the transaction parties: Client, Issuer, Credit Rating Agency, Investors, Legal Counsel and Servicers.|
|Asset||An item with economic value that an entity owns or controls.|
|Cash Flow||A financial term for monetary changes in operations, investing and financing activities.|
|Commercial Paper||A debt security of short term nature, less than a year.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The probability or likelihood that a borrower or issuer will not meet its debt obligations. Credit Risk can further be separated between current credit risk (immediate) and potential credit risk (deferred).|
|Debenture||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|Debt||An obligation to repay a sum of money.|
|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.|
|Hybrid||A form of security that has characteristics of various types of transaction or product.|
|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.|
|Junior||A security that has a lower repayment priority than senior securities.|
|Legal Opinion||An opinion regarding the validity and enforceable of a transaction’s legal documents.|
|Liability||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|Liquidity||The ability to repay short-term obligations or short-term availability of liquid assets to a market or entity.|
|Liquidity Facility||A facility provided to a structured finance transaction that will pay the Noteholders interest in the event that the underlying assets cash flows are inadequate.|
|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||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.|
|Loss||A tangible or intangible, financial or non-financial loss of economic value.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|National Scale Rating||The national scale 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.|
|Obligation||The title given to the legal relationship that exists between parties to an agreement when they acquire personal rights against each other for entitlement to perform.|
|Preference Shares||A source of long-term equity funding that has no voting rights and higher pay-out priority than common shares.|
|Pricing||A process of determining the price of a debt security.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Proceeds||Funds from issuance of debt securities or sale of assets.|
|Provision||An amount set aside for expected losses to be incurred by a creditor.|
|Rating Outlook||A 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).|
|Repurchase Agreement||One party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.|
|Secured Debenture||Debt securities that are secured by real security or collateral.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Senior||A security that has a higher repayment priority than junior securities.|
|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.|
|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.|
|Surveillance||Process of monitoring a transaction according to triggers, covenants and key performance indicators.|
|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 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.
The Issuer and 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 rating/s has been disclosed to the Issuer and the Administrator with no contestation of the rating.
The rating/s above were solicited by the Issuer of the Transaction; GCR has been compensated for the provision of the ratings.
GCR received the Programme Memorandum in relation to Southchester, monthly exposure reports from August 2016 to January 2017, draft copies of Transaction Documents, draft legal opinion and amendments to Transaction Documents where applicable.
Southchester (RF) Ltd Asset Backed Commercial Paper – Indicative Rating Accorded