Fitch Affirms Sanlam Alternative Income Fund at 'AA-(zaf)'

Tue Apr 15, 2014 3:01pm EDT

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(The following statement was released by the rating agency) LONDON, April 15 (Fitch) Fitch Ratings has affirmed Sanlam Alternative Income Fund's (SAIF) National Fund Credit Rating at 'AA-'(zaf). Fitch does not maintain a National Fund Volatility Rating on the fund therefore its rating is 'V-NR'. KEY RATING DRIVERS The affirmation is driven by the fund's broadly unchanged level of credit risk. The fund's weighted average rating factor (WARF) of 0.97 is consistent with a National Fund Credit Rating in the 'AA(zaf)' range and it is concentrated in issuers rated in the 'AA(zaf)' National rating category. Fitch has incorporated a conservative notching policy on the fund's direct, non-puttable, preference share investments in its analysis and a one-notch penalty to the WARF-implied National Fund Credit Rating consistent with Fitch's view that the fund is concentrated, a reflection of the structural concentration of the South African market and Fitch's rating approach for other South African funds. In Fitch's opinion, the liquidity of term preference shares, which account for around 42% of the fund's investments as of February 2014, may be limited in some circumstances. However, the fund's investment in liquid cash and money market unit trust funds (approximately 37% of the portfolio) mitigates liquidity risk. Furthermore, 64% of the total portfolio can be liquidated or redeemed in 90 days or less. Fitch's National Fund Credit Ratings do not address any risk other than credit risk. In particular, these ratings do not evaluate the impact of market risk on net asset value (NAV) variations, and therefore do not provide an indication of the stability of the fund's NAV. Importantly, the National Fund Credit Rating does not reflect the liquidity of the underlying assets. ASSET CREDIT QUALITY In assessing the fund's credit quality Fitch has made a number of assumptions. Specifically it has assumed that the credit risk of the puttable preference shares (around 33% of the portfolio as of February 2014) in the portfolio is that of the put provider, typically a major South African bank. This reflects the agency's understanding that the put options on the preference shares held by the fund are unconditional, irrevocable, enforceable and expediently recoverable. Where the fund invests in non-puttable preference shares issued directly (around 29% of the portfolio), Fitch has assumed a conservative notching policy in its rating analysis. In this case, Fitch has chosen to notch down direct preference share investments by three notches, from the respective issuer credit rating, to capture heightened loss severity due to subordination in the event of an issuer default. In the case of money market fund (MMF) investments (around 27% of the portfolio), the agency "looks-through" to the underlying holdings in the respective MMFs. Taking into consideration Fitch's notching approach, the fund is concentrated in issuers rated in the 'AA(zaf)' rating category. None of the fund's portfolio had a Negative Outlook or Rating Watch Negative as of April 2014. CONCENTRATION In Fitch's opinion, the fund is concentrated, as are other funds Fitch rates in South Africa, reflecting the structural concentration of the South African market. The fund's top three issuer exposure is consistently in excess of 50% of portfolio holdings, when including put providers and related entities and looking through to the underlying holdings of the MMFs. Consistent with the agency's applicable rating criteria, Fitch typically adjusts the WARF-implied National Fund Credit Rating of funds it deems concentrated down by one or more notches. The fund's concentrated holdings reflect the limited number of eligible issuers the fund can access. The fund's investment guidelines stipulate that all investments must be rated 'A-(zaf)' or better. Maximum individual issuer exposure is capped at 30% of the fund's assets, depending on maturity, credit quality and liquidity. The fund's holding in MMFs provides a limited diversification benefit to the fund, given that these funds and SAIF invest in a substantially similar pool of issuers. PORTFOLIO SENSITIVITY TO MARKET RISK The liquidity of the underlying assets is structurally constrained and therefore the fund has a 'V-NR' National Fund Volatility Rating. A 'V-NR' rating is assigned in certain illiquid markets and/or asset classes where it may not be feasible to derive a National Fund Volatility Rating. FUND PROFILE SAIF is a collective investment scheme established on 25 May 2007 as an open-ended rand-denominated preference share conduit fund with the objective to provide liquidity and capital preservation mainly through dividend-yielding underlying assets. As of February 2014, its assets under management were approximately ZAR7bn. It invests in plain vanilla unlisted cumulative, variable-rate preference shares redeemable within three to five years of issue, direct preference shares issues by bank-related funding vehicles and in money market unit trust funds. It may also invest in assets in liquid form, as defined under South Africa's Collective Investment Schemes Control Act 2002. In some cases the preference share issues are puttable to issuers rated 'A+(zaf)' or higher. THE ADVISOR The fund manager is Sanlam Collective Investments (SCI) and the co-investment managers are Ora Fund Managers and Sanlam Structured Solutions (a division of Sanlam Investment Management). SCI was established in 1967 and is a full subsidiary of Sanlam Limited (AA-(zaf)/Stable). At end-December 2013, SCI's assets under management totalled approximately ZAR91.8bn. The fund is regulated by the Financial Services Board of South Africa and the Collective Investment Scheme Control Act 2002. RATING SENSITIVITIES Funds in the 'AA'(zaf) National Fund Credit Rating category are considered to have high underlying credit quality. The fund's assets are expected to maintain a weighted-average rating of 'AA'. The ratings assigned to the fund may be sensitive to material changes in the fund's credit quality. A material adverse deviation from Fitch guidelines for any key rating driver could cause Fitch to downgrade the ratings. Specifically, if the fund's average credit quality, as measured by its WARF, exceeded the levels consistent with a 'AA(zaf)' category rating, then Fitch would expect to downgrade the National Fund Credit Rating based on deteriorating credit quality combined with concentration risk. Furthermore, the rating is sensitive to Fitch's view that the puts on the puttable preference shares are unconditional, irrevocable, enforceable and expediently recoverable and to Fitch's notching approach for direct preference share investments. Contacts: Primary Analyst Alastair Sewell Senior Director +44 20 3530 1147 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Richard Woodrow, CFA Associate Director +44 20 3530 1388 Committee Chairperson Ralph Aurora Senior Director +1 212 908 0528 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: Additional information is available at The sources of information used to assess this rating were the public domain, Ora Fund Managers, Sanlam Structured Solutions and SCI. Applicable criteria 'Global Bond Fund Rating Criteria', dated 13 August 2013, is available at Note to Editors: Fitch's National ratings provide a relative measure of creditworthiness for rated entities in countries with relatively low international sovereign ratings and where there is demand for such ratings. The best risk within a country is rated 'AAA' and other credits are rated only relative to this risk. National ratings are designed for use mainly by local investors in local markets and are signified by the addition of an identifier for the country concerned, such as 'AAA(zaf)' for National ratings in South Africa. Specific letter grades are not therefore internationally comparable. Applicable Criteria and Related Research: Global Bond Fund Rating Criteria here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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