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July 22 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has assigned Torque Securitisation (RF) Limited’s ZAR250m class A4 notes a ‘AAA(zaf)(EXP)’ expected rating with Stable Outlook.
The proceeds of the issuance will redeem the class A1 notes on their scheduled maturity date of 15 August 2014. The issuance’s overall balance will remain unchanged after the refinance.
The notes are backed by a revolving pool of South African auto loan receivables originated by Iemas Financial Services (Co-operative) Limited (Iemas, not rated). Iemas is the largest financial services trade co-operative in South Africa and has been originating auto loans since 1993.
Salary Deduction Drives Performance
The pool’s historical default rate performance has been in line with European auto transactions, despite South Africa’s higher unemployment rate and more volatile economic environment. This performance is driven by the fact that the majority of loans are repaid via salary deduction. Since inception in 2012, the transaction has recorded a total of 1.7% defaults.
Fitch has set a base case default assumption of 3.8% with multiples slightly above the criteria’s median (5.25x for ‘AAA(zaf)'), and a recovery rate base case of 50%, with median stresses (50% for ‘AAA(zaf)').
Employer Concentration Risk
The transaction is exposed to employer concentration risk as Iemas targets large employers across South Africa, originating loans to their respective employees. This risk is mitigated by concentration limits built into the transaction. Fitch has carried out scenario analysis of the effect of insolvency of the top employers and is comfortable that available credit enhancement is sufficient to cover for potential additional defaults stemming from this risk.
Fitch has identified some weaknesses in the transaction documentation where definitions or descriptions conflict or include, in Fitch’s view, manifest errors. Fitch understands from the originator and the administrator that these issues are unintended and that the transaction documents will be amended - subject to noteholder consent - to reflect the intended structure by October 2014.
Given the currently stable performance Fitch does not view the weaknesses as an imminent risk. However, should the transaction documentation not be amended in due course, the ratings could be negatively affected.
Evergreen Transaction, Subsequent Issuances
The transaction featured an initial two-year revolving period, which can be extended continuously by two years. The purchase of additional assets during the revolving period will be subject to various eligibility covenants. Moreover, the transaction allows for additional issuances of notes of varying maturity and seniority. Fitch will carry out a full rating analysis upon each future issuance.
Outsourced Securitisation Services (Pty) Ltd (a subsidiary of Deloitte South Africa) has been mandated as back-up servicer and receives monthly portfolio information. In addition, the transaction benefits from a liquidity facility provided by (FirstRand Bank Limited, AA(zaf)/Stable/F1+(zaf)) that is sufficient to cover around three months of senior fees and interest. Both measures should support a smooth transition of servicing if needed.
Stable Asset Outlook
Fitch has a stable asset outlook for South African consumer ABS transactions. While a mild slowdown in the South African economy is expected over the next 12 months, the agency believes that defaults are likely to remain within base-case expectations, as they already incorporate Fitch’s short-term macroeconomic expectations.
Credit enhancement is provided via overcollateralisation which is funded via the junior notes and the subordinated loan, and a cash reserve fund of 1%, which was also funded via the subordinated loan. For example, the class A notes benefit from 23.8% credit enhancement, which is provided by 22.8% overcollateralisation and the 1% cash reserve.
Unexpected Deterioration in Portfolio Performance
Unexpected increases in the default rate and loss severity on defaulted loans could produce loss levels higher than Fitch’s assumptions and could result in potential rating actions on the notes.
Rating sensitivity of the class A notes to increased default rate assumptions: Current rating: ‘AAA(zaf)(EXP)’
Increase in default rate by 10%: ‘AA+(zaf)(EXP)’
Increase in default rate by 25%: ‘AA(zaf)(EXP)’
Increase in default rate by 50%: ‘A+(zaf)(EXP)’
Rating sensitivity of the class A notes to reduced recovery rate assumptions: Current rating: ‘AAA(zaf)(EXP)’
Decrease in recovery rate by 10%: ‘AA+(zaf)(EXP)’
Decrease in recovery rate by 25%: ‘AA+(zaf)(EXP)’
Decrease in recovery rate by 50%: ‘AA+(zaf)(EXP)’
Rating sensitivity of the class A notes to multiple factors:
Current rating: ‘AAA(zaf)(EXP)’
Increase in default rate by 10%, decrease in recovery rate by 10%: ‘AA+(zaf)(EXP)’
Increase in default rate by 25%, decrease in recovery rate by 25%: ‘AA-(zaf)(EXP)’
Increase in default rate by 50%, decrease in recovery rate by 50%: ‘A(zaf)(EXP)’ Upon completion of the refinancing the capital structure will be as follows:
ZAR238m Class A2: ‘AAA(zaf)'; Outlook Stable
ZAR200m Class A3: ‘AAA(zaf)'; Outlook Stable
ZAR250m Class A4: ‘AAA(zaf)'; Outlook Stable
ZAR84m Class B: ‘A+(zaf)'; Outlook StableZAR49m Class C: ‘BBB(zaf)'; Outlook Stable
ZAR70m Class D: Not rated
Fitch expects to affirm the above ratings on the refinance date. Key Rating Drivers and Rating Sensitivities are further described in the presale report, which will be available at www.fitchratings.com
Link to Fitch Ratings’ Report: Torque Securitisation (RF) Limited - 2014 Refinance