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Feb 20 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Fox Street 2 (RF) Limited (Fox Street 2) National final ratings, as follows:
ZAR80m class A1 notes: ‘F1+(zaf)’
ZAR150m class A2 notes: ‘AAA(zaf)'; Outlook Stable
ZAR220m class A3 notes: ‘AAA(zaf)'; Outlook Stable
ZAR220m class A4 notes: ‘AAA(zaf)'; Outlook Stable
ZAR586m class A5 notes: ‘AAA(zaf)'; Outlook Stable
ZAR126m class B1 notes: ‘A-(zaf)'; Outlook Stable
ZAR50m class C1 notes: ‘BBB-(zaf)'; Outlook Stable
ZAR35m class D1 notes: ‘BB(zaf)'; Outlook Stable
ZAR119.2m subordinated loan: not rated
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, the class A1 to A4 notes benefit from higher CE than the class A5 notes (see the New Issue 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. However, in Fitch’s opinion, 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 Investec’s eighth standalone South African RMBS transaction.
Robust Asset Performance and Underwriting
The historical performance of Investec’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. 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 Investec’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 the class A1 and A2 notes) at their outstanding principal (plus accrued interest) minus any amount written on the principal deficiency balance’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 cash flow analysis, Fitch considers the additional note losses potentially resulting from this feature as remote. In addition, these losses are not expected on the class A notes, even under a ‘AAA(zaf)’ scenario, as Fitch does not expect class A to have a positive PDL.
Stable Asset Outlook
Fitch expects stable mortgage performance in the short to medium term. Rising interest rates are a 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. Some examples of sensitivities to the foreclosure and recovery rates are below. The ratings for the class A notes below only refer to the sub-class A5 notes. More senior sub-classes are less sensitive to the changes assumed below. More detailed model implied ratings sensitivity can be found in the New Issue 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)'/‘BB(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: 83.6%): ‘AAA(zaf)'/‘A-(zaf)'/‘BBB-(zaf)'/‘BB(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