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Rating Action:

Moody's Investors Service assigns definitive ratings to South African RMBS notes issued by Nqaba Finance 1 (RF) Limited

22 May 2017

London, 22 May 2017 -- Moody's Investors Service has today assigned definitive long-term credit ratings to the new notes issued by Nqaba Finance 1 (RF) Limited as detailed below:

ZAR 5M Class A23 Secured Floating Rate Note due May 2050, Definitive Rating Assigned A1(sf) / Aaa.za(sf)

ZAR 310M Class A24 Secured Floating Rate Note due May 2052, Definitive Rating Assigned A1(sf) / Aaa.za(sf)

ZAR 150M Class A25 Secured Floating Rate Note due May 2054, Definitive Rating Assigned A1(sf) / Aaa.za(sf)

ZAR 48M Class A26 Secured Floating Rate Note due May 2050, Definitive Rating Assigned A1(sf) / Aaa.za(sf)

ZAR 32M Class B19 Secured Floating Rate Note due May 2050, Definitive Rating Assigned A3(sf) / Aaa.za(sf)

ZAR 32M Class C19 Secured Floating Rate Note due May 2050, Definitive Rating Assigned Baa1(sf) / Aaa.za(sf)

Moody's has also affirmed the existing ratings of the ZAR 115M Class A10 Secured Fixed Rate Note due May 2052 at A1(sf) / Aaa.za(sf), the ZAR 302M Class A17 Secured Floating Rate Note due May 2050 at A1(sf) / Aaa.za(sf), the ZAR 303M Class A19 Secured Floating Rate Note due May 2050 at A1(sf) / Aaa.za(sf), the ZAR 210M Class A21 Secured Floating Rate Note due May 2051 at A1(sf) / Aaa.za(sf), the ZAR 11M Class B10 Secured Fixed Rate Note due May 2052 at A3(sf) / Aaa.za(sf), the ZAR 40M Class B15 Secured Floating Rate Note due May 2050 at A3(sf) / Aaa.za(sf), the ZAR 8M Class B17 Secured Floating Rate Note due May 2050 at A3(sf) / Aaa.za(sf), the ZAR 5M Class C10 Secured Fixed Rate Note due May 2052 at Baa1(sf) / Aaa.za(sf), the ZAR 25M Class C15 Secured Floating Rate Note due May 2050 at Baa1(sf) / Aaa.za(sf), the ZAR 5M Class C17 Secured Floating Rate Note due May 2050 at Baa1(sf) / Aaa.za(sf), the ZAR 5M Class D5 Secured Floating Rate Note due May 2052 at Baa2(sf) / Aa1.za(sf), the ZAR 30M Class D7 Secured Floating Rate Note due May 2050 at Baa2(sf) / Aa1.za(sf), and the ZAR 24M Class D8 Secured Floating Rate Note due May 2051 at Baa2(sf) / Aa1.za(sf).

The new notes have refinanced the existing Class A18, A22, B16 and C16 notes having the scheduled maturity date on 22 May 2017. The capital structure also includes an unrated subordinated loan of ZAR 290 million.

This transaction represents the first public securitisation transaction rated by Moody's backed by home loans advanced by Eskom Finance Company SOC Limited ("EFC", not rated) to employees of Eskom Holdings SOC Limited ("Eskom", Ba1 under review for possible downgrade) and its subsidiaries. The transaction originally closed in May 2006. The assets supporting the notes, which amount to around ZAR 1,919.3 million, consist of South African prime residential home loans extended to individuals and are backed by first economic lien mortgages on residential properties located in South Africa.

The portfolio is serviced by EFC, with ABSA Bank Limited ("ABSA"; Baa2/P-2 Possible Downgrade, Baa2(cr)/P-2(cr) Possible Downgrade, Aa1.za/P-1.za) serving in the role of back-up servicer. ABSA will be contractually bound to step in as servicer upon a servicer event of default by EFC.

RATINGS RATIONALE

The rating of the notes is based on an analysis of the characteristics of the underlying pool of home loans, sector wide and originator specific performance data, protection provided by credit enhancement, the roles of external counterparties and the structural integrity of the transaction.

The expected portfolio loss of 0.80% of the current balance of the portfolio and the MILAN required Credit Enhancement ("MILAN CE") of 11%, served as input parameters for Moody's cash flow model, which is based on a probabilistic lognormal distribution.

The key drivers for the portfolio expected loss, which at 0.80% is below an average expected loss for a South African RMBS transaction, are: (i) a less risky pool of assets compared to similar South African RMBS transactions. Home loans advanced by EFC to Eskom's employees or its subsidiaries have their instalments directly deducted from the employees' payrolls (therefore limiting the probability of the borrower wilful default). In addition, these borrowers benefit from Eskom's support in the form of subsidies; (ii) 8 years of vintage data on loans in arrears for greater than three months from the originator's book, exhibiting a cumulative default rate around 0.32%; (iii) 6 years of loan by loan repossession data from the originator's book showing that the overall recovery rate from property sales is around 73%; (iv) the strong performance of the subject transaction, with 90+ delinquency rates attaining very low levels over the past 10 years (around 0.44% as per the February 2017 investor report); (v) high seasoning of over 10 years; (vi) the current and future macroeconomic environment in South Africa; and (vii) benchmarking with other South African RMBS transactions.

The key drivers for the MILAN CE, which at 11% is in line with an average South African RMBS transaction, are: (i) the WA LTV of around 67.28%; (ii) the indefinite revolving period together with the possibility for redraws, further advances and further loans; (iii) the high seasoning of the pool; (iv) the assumption that, even if Eskom is solvent, in a stressed scenario half of the employees will not benefit from Eskom's support in the form of subsidies; and (v) benchmarking with other South African RMBS transactions.

Transaction is dependent on Eskom: The transaction's performance is strongly dependent on Eskom, as the large majority of the borrowers in the pool (92.4%) are employed by Eskom or its subsidiaries and pay the mortgage instalments via salary deduction. Eskom also provides support to borrowers in the form of subsidies. Moody's has taken into account Eskom's critical role as South African state-owned utility provider which generates, transmits and distributes almost all of the country's electricity. Moody's has also considered in the cash flow modelling the loss that the transaction can incur upon Eskom's insolvency.

Indefinite revolving period: The transaction envisages an evergreen revolving period, as new loans can be purchased by the Issuer until the breach of certain early amortization triggers. There are also global portfolio limits which to some extent constrain the changes in portfolio composition during the revolving period.

Operational risk analysis: ABSA acts as back-up servicer from inception. However, ABSA has the right to terminate its back-up servicing agreement if EFC is sold. Upon a sale of EFC, the issuer may, but is not obliged to appoint a suitable back-up servicer. Moody's understands that this reduces the benefit of the back-up servicing arrangement and increases the reliance of the transaction on EFC following its disposal.

Interest Rate Risk Analysis: The portfolio comprises of floating rate loans linked to 3 months JIBAR that reset on the same day of the 3 months JIBAR payable under the notes. Therefore there is no basis risk between the interest rate on the loans and the interest rate on the notes. The A10, B10 and C10 notes are fixed rate notes and the Issuer entered into an interest rate swap with ABSA in order to hedge the fixed-floating rate risk. Under each swap, the Issuer receives a fixed rate and pays a floating rate of JIBAR plus a spread. The notional is equal to the outstanding amount of A10, B10 and C10 notes, respectively. Moody's applied a haircut to the portfolio yield to account for the spread compression due to the earlier amortization of loans with higher interest rate.

Transaction structure: ABSA has provided a liquidity facility sized at 2.0% of the notes balance at closing and decreasing to 2.0% of the outstanding notes balance. The liquidity facility is available to cover for shortfalls in payments of interest on Classes A to D notes and items senior thereto, subject to the Asset Quality Test being satisfied. The Asset Quality Test is fulfilled if the balance of the pool (excluding loans in arrears for greater than 3 months and defaulted assets) is sufficient to repay the Issuer's obligations under the liquidity facility and the redraw facility agreements.

The definitive ratings address the expected loss posed to investors by the legal final maturity of the notes. In Moody's opinion, the structure allows for timely payment of interest and ultimate payment of principal with respect to the Class A, Class B, Class C and Class D notes by legal final maturity. Other non-credit risks have not been addressed, but may have significant effect on yield to investors.

Moody's Parameter Sensitivities: If the portfolio expected loss remained at 0.80% and the MILAN CE was increased to 13.2% from 11%, the model output indicates that the Class A notes would still achieve A1(sf), the Class B would still achieve A3(sf), the Class C would still achieve Baa1(sf) and the Class D would still achieve Baa2(sf), assuming that all other factors remained unchanged. Moody's Parameter Sensitivities provide a quantitative/model-indicated calculation of the number of rating notches that a Moody's structured finance security may vary if certain input parameters used in the initial rating process differed. The analysis assumes that the deal has not aged and is not intended to measure how the rating of the security might migrate over time, but rather how the initial rating of the security might have differed if key rating input parameters were varied. Parameter Sensitivities for the typical EMEA RMBS transaction are calculated by stressing key variable inputs in Moody's primary rating model.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping Moody's National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_189530.

The principal methodology used in these ratings was "Moody's Approach to Rating RMBS Using the MILAN Framework" published in September 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The analysis undertaken by Moody's at the initial assignment of ratings for RMBS securities may focus on aspects that become less relevant or typically remain unchanged during the surveillance stage. Please see Moody's Approach to Rating RMBS Using the MILAN Framework for further information on Moody's analysis at the initial rating assignment and the on-going surveillance in RMBS.

Please note that on 22 March 2017, Moody's released a Request for Comment, in which it has requested market feedback on potential revisions to its Approach to Assessing Counterparty Risks in Structured Finance. If the revised Methodology is implemented as proposed, the credit rating on Nqaba Finance 1 (RF) Limited may be affected. Please refer to Moody's Request for Comment, titled " Moody's Proposes Revisions to Its Approach to Assessing Counterparty Risks in Structured Finance," for further details regarding the implications of the proposed Methodology revisions on certain Credit Ratings.

FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS:

Factors that may lead to an upgrade of the ratings include significantly better than expected performance of the pool, together with an increase in the credit enhancement of the notes. However the upgrade potential is limited as there is a degree of linkage between the rating of the notes and that of sovereign and the Government of South Africa's rating is currently under review for possible downgrade. Factors that may cause a downgrade of the ratings include significantly different loss assumptions compared with our expectations at close due to either a change in economic conditions from our central scenario forecast or idiosyncratic performance factors would lead to rating actions. For instance, should economic conditions be worse than forecast, the higher defaults and loss severities resulting from a greater unemployment, worsening household affordability and a weaker housing market could result in downgrade of the ratings. A downgrade or insolvency of Eskom can result in a deterioration of the transaction's performance and in downgrade of the ratings. A deterioration in the notes available credit enhancement could result in a downgrade of the ratings. Counterparty risk could cause a downgrade of the rating due to a weakening of the credit profile of transaction counterparties. Additionally an increase in South Africa sovereign risk or unforeseen regulatory and legal changes may also result in changes of the ratings.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions of the disclosure form.

The analysis relies on an assessment of collateral characteristics to determine the collateral loss distribution, that is, the function that correlates to an assumption about the likelihood of occurrence to each level of possible losses in the collateral. As a second step, Moody's evaluates each possible collateral loss scenario using a model that replicates the relevant structural features to derive payments and therefore the ultimate potential losses for each rated instrument. The loss a rated instrument incurs in each collateral loss scenario, weighted by assumptions about the likelihood of events in that scenario occurring, results in the expected loss of the rated instrument.

Moody's quantitative analysis entails an evaluation of scenarios that stress factors contributing to sensitivity of ratings and take into account the likelihood of severe collateral losses or impaired cash flows. Moody's weights the impact on the rated instruments based on its assumptions of the likelihood of the events in such scenarios occurring.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Elisa Scalco
Analyst
Structured Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Barbara Rismondo
Senior Vice President/Manager
Structured Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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