(Repeat for additional subscribers)
Jan 20 (The following statement was released by the rating agency)
Fitch Ratings has assigned Fox Street 2 (RF) Limited
(Fox Street 2) National expected ratings, as follows:
ZAR80m class A1 notes: 'F1+(zaf)(EXP)'
ZAR150m class A2 notes: 'AAA(zaf)(EXP)'; Outlook Stable
ZAR220m class A3 notes: 'AAA(zaf)(EXP)'; Outlook Stable
ZAR220m class A4 notes: 'AAA(zaf)(EXP)'; Outlook Stable
ZAR586m class A5 notes: 'AAA(zaf)(EXP)'; Outlook Stable
ZAR126m class B1 notes: 'A-(zaf)(EXP)'; Outlook Stable
ZAR50m class C1 notes: 'BBB-(zaf)(EXP)'; Outlook Stable
ZAR35m class D1 notes: 'BB(zaf)(EXP)'; Outlook Stable
ZAR119.2m subordinated loan: not rated
The final ratings are contingent on the receipt of final documentation
conforming to information already reviewed.
Credit enhancement (CE) is provided by overcollateralisation and various cash
reserves, and represents 22% at closing for the class A5 notes, 13.6% for the
class B1 notes, 10.3% for the class C1 notes and 7.9% for the class D1 notes. As
a result of repayment subordination, classes A1 to A4 benefit from a CE higher
than A5 (see the presale report for more details). In addition, the transaction
features some over-collateralisation of interest, resulting from the junior
position of the interest payable under the subordinated loan in the interest
priority of payments (PoP).
The class A1 notes mature only 12 months after closing and the class A2 notes
three years after closing. In Fitchâ€™s opinion, however, these notes can be
repaid by their legal final maturity under prepayment rate assumptions
significantly below historical observations.
Fox Street 2 is a securitisation of mortgage loans granted by Investec Bank
Limited's (Investec, A+(zaf)/Stable/F1(zaf)) to its private banking clients in
South Africa. This is Investecâ€™s eighth standalone South African RMBS
KEY RATING DRIVERS
Robust Asset Performance and Underwriting
The historical performance of Investecâ€™s mortgage loan book is stronger than the
market average for South Africa. In Fitch's opinion, this is due to the credit
profile of Investec's private banking clients as well as the underwriting
practises established. The agency has considered this by applying a 10% downward
lender adjustment to the default probability at 'B(zaf)'.
Bespoke Customer Profile
All borrowers are Investecâ€™s private banking clients who typically earn in
excess of ZAR800,000 per year or are professionals with high future income.
Compared with standard prime borrowers, these customers tend to have higher
leverage but are expected to have a lower risk profile and to pay down their
loans more quickly.
Large Properties and Loan Exposures
The portfolio consists of larger-than-average loans secured by higher value
properties. Fitch has made relevant adjustments as per its criteria to address
the risk of steeper sale discounts.
The transaction has a strict separation of the interest and principal PoP, which
could result in shortages in the interest PoP should performance deteriorate.
The liquidity reserve mitigates this risk, but once it is depleted it is
unlikely to be replenished with interest proceeds (from underlying assets)
alone. This constrains the ratings of the notes (except the class A notes) and
explains the difference between the CE and portfolio losses assumed by Fitch for
each rating scenario.
Unusual Call Option Mechanism
The originator has the option to repurchase notes from 60 months after closing
(except for class A1 and A2) at their outstanding principal (plus accrued
interest) minus any amount written on the principal deficiency balanceâ€™s ledger
(PDL) as of the call date. Losses that could otherwise cure may crystallise as a
result of the call option. Based on the stressed cashflowâ€™s analysis, Fitch
however sees the additional note losses potentially resulting from this feature
as remote. In addition, no such losses are expected on the class A notes, even
under a â€˜AAA(zaf)â€™ scenario, as Fitch does not expect class A to have a positive
Stable Asset Outlook
Fitch expects stable mortgage performance in the short- to medium-term. Rising
interest rates are one downside risk. Fitch expects a modest tightening in
monetary policy by end-2014, but given inflationary pressures and the recent
depreciation of the rand, the agency cannot rule out the possibility of a
sharper rise in rates.
Material increases in the frequency of defaults and loss severity on defaulted
receivables could produce loss levels higher than Fitch's base case
expectations, which in turn may result in potential rating actions on the notes.
See below for some examples of sensitivities to the foreclosure and recovery
rates. It should be noted that the ratings for class A in the list below refer
to sub-class A5 only: more senior sub-classes are less sensitive to the changes
assumed below. More detailed model implied ratings sensitivity can be found in
the presale report available at www.fitchratings.com.
Rating sensitivity to increased foreclosure rate (class A / B /C / D)
Current ratings (base case: 6.2%): 'AAA(zaf)' / 'A-(zaf)' / 'BBB-(zaf)' /
Increase base case by 15%: 'AAA(zaf)' / 'BBB+(zaf)' / 'BBB-(zaf)' / 'BB(zaf)'
Increase base case by 30%: 'AAA(zaf)' / 'BBB(zaf)' / 'BB+(zaf)' / 'BB-(zaf)'
Rating sensitivity to decreased recovery rate (class A / B /C / D)
Current ratings (base case: 79.1%): 'AAA(zaf)' / 'A-(zaf)' / 'BBB-(zaf)' /
Decrease base case by 15%: 'AAA(zaf)' / 'A-(zaf)' / 'BBB-(zaf)' / 'BB(zaf)'
Decrease base case by 30%: 'AAA(zaf)' / 'A-(zaf)' / 'BBB-(zaf)' / 'BB-(zaf)'
Rating sensitivity to increased foreclosure rate and decreased recovery rate
(class A / B /C / D)
Current ratings: 'AAA(zaf)' / 'A-(zaf)' / 'BBB-(zaf)' / 'BB(zaf)'
Increase foreclosure rate by 15% and decrease recovery rate by 15%: 'AAA(zaf)' /
'BBB+(zaf)' / 'BB+(zaf)' / 'BB-(zaf)'
Increase foreclosure rate by 30% and decrease recovery rate by 30%: 'AA(zaf)' /
'BBB-(zaf)' / 'BB(zaf)' / 'B+(zaf)'
Link to Fitch Ratings' Report: Fox Street 2 (RF) Limited