TEXT-Fitch affirms Nqaba Finance 1 ratings after Eskom rating revision

Thu Jan 24, 2013 11:48am EST

Jan 24 - Fitch Ratings has affirmed Nqaba Finance 1 as follows:

Class A9 affirmed at 'AAA(zaf)'; Outlook Stable
Class A10 affirmed at 'AAA(zaf)'; Outlook Stable
Class A11 affirmed at 'AAA(zaf)'; Outlook Stable
Class A12 affirmed at 'AAA(zaf)'; Outlook Stable
Class A14 affirmed at 'AAA(zaf)'; Outlook Stable
Class A15 affirmed at 'AAA(zaf)'; Outlook Stable
Class B9 affirmed at 'AA(zaf)'; Outlook Stable
Class B10 affirmed at 'AA(zaf)'; Outlook Stable
Class B11 affirmed at 'AA(zaf)'; Outlook Stable
Class B12 affirmed at 'AA(zaf)'; Outlook Stable
Class B13 affirmed at 'AA(zaf)'; Outlook Stable
Class B14 affirmed at 'AA(zaf)'; Outlook Stable
Class C9 affirmed at 'A+(zaf)'; Outlook Stable
Class C10 affirmed at 'A+(zaf)'; Outlook Stable
Class C11 affirmed at 'A+(zaf)'; Outlook Stable
Class C13 affirmed at 'A+(zaf)'; Outlook Stable
Class C14 affirmed at 'A+(zaf)'; Outlook Stable
Class D4 affirmed at 'A-(zaf)'; Outlook Stable
Class D5 affirmed at 'A-(zaf)'; Outlook Stable
Class D6 affirmed at 'A-(zaf)'; Outlook Stable

The transaction is a securitisation of mortgage loans originated by Eskom
Finance Company ('EFC', Not Rated) incorporated in South Africa. The mortgages
have been advanced by EFC to employees of Eskom Holdings SOC Limited (Eskom,
'AAA(zaf)'/Stable/'F1+(zaf)') and its group companies.

South Africa's sovereign local currency Long-term Issuer Default Rating was
downgraded to 'BBB+' on 10 January 2013, and the subsequent recalibration of
South Africa's national rating scale resulted in Eskom's National scale rating
being revised to AA+(zaf). During the initial rating analysis Fitch has
communicated that the ratings on Nqaba's notes would be capped at Eskom's
National scale rating as the company is the employer of the large majority of
borrowers. Fitch maintains that there is a much stronger dependency for Nqaba's
notes ratings on the credit quality of the originator than in other RMBS
transactions as it is the key employer of borrowers. However, Fitch has changed
its view towards a strict rating cap and henceforth will allow for a limited
rating differential.

Fitch maintains that the employer concentration in Nqaba creates inherent risks
that could materialise upon an Eskom insolvency, and which are not present in
other RMBS transactions: (1) following an Eskom default a corporate
restructuring could lead to substantial pay cuts or redundancies, which would
impact a large number of the borrowers; (2) mortgage payments are directly
deducted from the employees' salaries, which currently supports the positive
performance and this may not continue; (3) Eskom provides an interest subsidy to
borrowers which may no longer be available making the loans less affordable to
borrowers; and (4) the default of an employer can in certain scenarios give rise
to set off claims from the employee/borrower.

However, Fitch believes that there are sufficient mitigants in place to address
these concerns: (1) the nature of Eskom's business as monopolist utility
provider does, in the agency's view, make mass redundancies or a company
liquidation less likely; (2) Nqaba benefits from structural protection through
credit enhancement and liquidity that allows the notes to withstand a
substantial number of defaults - maintaining the original recovery assumptions
Fitch has calculated that the class A tranches will be able to withstand default
rates of up to 36%.; and (3) In Fitch's view the structural protection including
the aforementioned credit enhancement supports a higher note rating when
compared to Eskom's National long-term rating. Therefore the agency believes
that the specific risks are reflected in the notes' current ratings. Any
deterioration of Eskom's National scale rating will trigger a review of Nqaba's
notes ratings and may result in a downgrade.

In case of Eskom no longer maintaining a 'AAA(zaf)' rating, the transaction
documentation provides for an early amortisation of the notes. Fitch has been
informed by the issuer of the intention to seek noteholder approval to either
waive or remove this early amortisation trigger. While it is unclear if this
request will be successful, the outcome does not impact Fitch's ratings of the
notes.

The transaction is performing in line with expectations. 3m+ arrears levels have
been falling since February 2011 and currently stand at 0.24%, which are the
lowest 3m+ arrears of all Fitch rated South African RMBS transactions reflecting
its unique structure. The number of loans in litigation has been stable at 0.6%.
There is also sufficient credit enhancement in the transaction. Fitch believes
the underlying performance is commensurate with the current rating levels.

Additional information is available on www.fitchratings.com.

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

Applicable criteria, 'EMEA criteria Addendum - South Africa', dated March 2012;
'Counterparty Criteria for Structured Finance', dated 30 May 2012, 'EMEA RMBS
Master Rating Criteria', dated June 2012, and 'Criteria for Servicing Continuity
Risk in Structured Finance', dated August 2012 all available at
www.fitchratings.com.

Applicable Criteria and Related Research:
EMEA Criteria Addendum - South Africa - Mortgage and Cashflow Assumptions
Counterparty Criteria for Structured Finance Transactions
EMEA RMBS Master Rating Criteria
Criteria for Servicing Continuity Risk in Structured Finance
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