What is worth noting is that
rating of the notes was derived by
applying a notching up approach,
beginning with the long-term
corporate rating of the issuers.
Accelerate’s corporate credit rating
is actually BBB+, based on its
fundamentals and prospects. With
regards to the senior secured notes
however, a rating uplift of four
notches was awarded by the rating
agency, given the ‘superior recovery
prospects’ of the notes.
Similarly, Emira’s corporate credit
rating is A. In determining the
number of notches to be applied,
GCR compared the recovery rate
on the notes in the event of a
default, to an assumed unsecured
debt recovery rate. If the former
is higher, then a notching uplift is
applied. Based on this analysis,
Emira’s senior secured notes were
deemed to have ‘excellent recovery
prospects’, resulting in a three notch
uplift from the corporate rating.
At this point, an important
distinction must be made between
the probability of default and the
loss given default. Both Accelerate’s
and Emira’s senior secured notes
end up having a higher rating
(resulting in lower pricing) because
of a lower loss given default.
However, the probability of default
of the issuers remains the same.
Investors who wish to bid based on
their assessment of the probability
of default, should ensure that they
take into account the corporate
(issuer) rating, as opposed to the
notes’ (issue) rating.
In reality, KTH’s portfolio is highly
concentrated, with the three
largest investments – Kagiso
Media, MMI Holdings and Exxaro
Resources – making up about 57%
of the portfolio. Interest cover,
which was 3x at the last reporting
date, is subject to the risk that
investee companies could reduce
or discontinue dividend payments,
which would have an adverse effect
on KTH’s ability to service its debt.
KTH had a moderate level of market
value leverage – defined as net debt
to portfolio market value – of 32.6%
at the last reporting date; however,
this measure is likely to come under
significant pressure in the event of
stressed equity valuations.
INVESTEC CATCHES A BREAK
Investec returned to the market,
raising a cumulative R1.9 billion
across three- and five-year senior
paper. The bank tapped an existing
bond and issued two new bonds.
The three-year funding was raised
at a credit spread of 140bp over
the three-month interbank rate,
and the five-year paper at a spread
of 165bp.
Last month we wrote about
Investec’s unsuccessful attempt
to raise R500 million at the end
of June, with only R130 million of
three-year funding raised within the
pricing guidance. The bank appears
to have fared better this time, but
at a price. The pricing guidance on
the three-year notes for the June
auction had been between 125bp
and 135bp over the three-month
interbank rate. R763 million in
bids was received, of which over
R500 million was at credit spreads
in excess of 140bp. It must be a
testimony to the beauty of timing
that in August the bank managed to
raise a whole R912 million of threeyear funding at only 5bp wider than
the previous issuance.
FROM PRINTERS TO CARS
The South African Securitisation
Programme (SASP), consisting of
equipment leases, issued R332
million in three-year and fiveyear paper. The notes, rated AAA,
were priced at 150bp and 184bp
respectively over the three-month
interbank rate.
Torque Securitisation, which
provides auto loans among others,
raised R371 million across various
three-year notes. The AAA-rated
A5 notes priced at 180bp over the
three-month interbank rate.
Interesting to note is the 30bp
difference in pricing between the
two securitisations’ three-year
paper, which is likely due to the
fact that business equipment
leases tend to be more resilient
than auto loans in adverse
economic conditions.
By Londo Nxumalo
KAGISO ISSUES
REDEEMABLE PREFS
Kagiso Sizanani Capital issued
R800m of five-year floating rate
notes. The notes priced at 385bp
over the three-month interbank
rate, and are guaranteed by
Kagiso Tiso Holdings (KTH). KTH
is rated Baa2 by Moody’s on the
national scale.
As an investment holding company,
KTH’s credit rating is underpinned
by its underlying equity portfolio.
As such, positive support for the
rating is dependent on a diverse
portfolio spanning different sectors,
the ability to liquidate investments
easily, and increased influence and
control of key investments in order
to be able to influence dividend
policy.
ISSUE 6 – SEPTEMBER 2015
31