OREANDA-NEWS. Fitch Ratings has assigned Nqaba Finance 1 (RF) Limited's (Nqaba Finance 1) additional floating-rate notes (FRN) National Long-term final ratings, as follows:

ZAR195m Class A20 FRN: 'AAA(zaf)'; Outlook Stable
ZAR210m Class A21 FRN: 'AAA(zaf)'; Outlook Stable
ZAR24m Class D8 FRN: 'A-(zaf)'; Outlook Stable

Fitch has also affirmed all the existing ratings on the outstanding notes, as follows:

ZAR115m Class A10 fixed rate notes: 'AAA(zaf)'; Outlook Stable
ZAR302m Class A17 FRN: 'AAA(zaf)'; Outlook Stable
ZAR318m Class A18 FRN: 'AAA(zaf)'; Outlook Stable
ZAR303m Class A19 FRN: 'AAA(zaf)'; Outlook Stable
ZAR11m Class B10 fixed rate notes: 'AA(zaf)'; Outlook Stable
ZAR40m Class B15 FRN: 'AA(zaf)'; Outlook Stable
ZAR32m Class B16 FRN: 'AA(zaf)'; Outlook Stable
ZAR8m Class B17 FRN: 'AA(zaf)'; Outlook Stable
ZAR5m Class C10 fixed rate notes: 'A+(zaf)'; Outlook Stable
ZAR25m Class C15 FRN: 'A+(zaf)'; Outlook Stable
ZAR32m Class C16 FRN: 'A+(zaf)'; Outlook Stable
ZAR5m Class C17 FRN: 'A+(zaf)'; Outlook Stable
ZAR5m Class D5 FRN: 'A-(zaf)'; Outlook Stable
ZAR30m Class D7 FRN: 'A-(zaf)'; Outlook Stable

The capital structure also includes an unrated subordinated loan of ZAR290m. The new notes have refinanced the existing class A11, A16 and D6 notes which matured today.

The transaction is a refinancing of a portion of a securitisation of residential mortgage loans advanced by Eskom Finance Company SOC Limited (EFC) to employees of Eskom Holdings SOC Limited (Eskom, AAA(zaf)/Stable/F1+(zaf)) and its subsidiaries.

Credit enhancement will be provided by overcollateralisation and total 26% for the class A notes, 21.3% for the class B notes, 17.9% for the class C notes and 14.9% for the class D notes. In addition, the transaction features significant overcollateralisation of interest, resulting from the junior position of the interest payable under the subordinated loan in the priority of payments.

KEY RATING DRIVERS
Asset Performance
The historical performance of the underlying assets is strong relative to the rest of the South African mortgage market, with 90 days delinquency rates of 0.4% as of the February 2016 investor report. This strong performance is due to borrowers' stable employment background and the collection of mortgage payments through payroll deduction. As of end-February 2016, 93.2% of loans in the cut-off portfolio were to employees of Eskom and subsidiaries and serviced by payroll deduction.

Revolving Period
The transaction features "evergreen" revolving, as the purchase of new loans is allowed until the breach of certain performance triggers. It is also subject to certain covenants on the portfolio features. In addition, many borrowers also have the ability to further draw down their loans. Fitch has accounted for the potentially detrimental impact of these features on the portfolio's credit quality.

Eskom Dependency
The transaction's performance is strongly dependent on that of Eskom as (i) the majority of borrowers are employed by Eskom and pay the instalments by salary deduction; (ii) Eskom provides support to borrowers in the form of subsidies; and (iii) there is some operational dependency on Eskom and its subsidiary EFC.

This dependency does not currently impact Nqaba's notes' ratings given Eskom's 'AAA(zaf)' rating and the nature and status of its business. As it is a monopolistic state-owned utility provider, Fitch believes that the company is likely to continue operating even under severe stress.

Overcollateralisation of Interest
The interest due on the subordinated loan, which funds part of the mortgage portfolio purchase price, is junior to the principal note allocations. This provides significant net income after note interest payment, which supports the senior notes' credit quality.

Planned Sale of EFC
The South African government has requested the sale of EFC but the process has been ongoing for several years. However, based on the letter of undertaking provided by Eskom, the company is committed to maintaining payroll deductions and subsidy payments to the borrowers after a sale of EFC. Moreover, monthly payments are made by Eskom from payroll deductions and deposited directly into the SPV's accounts.

However, back-up servicer ABSA has the right to terminate the back-up servicing agreement in case of a sale of EFC. This could further increase the transaction's operational reliance on EFC to perform as servicer. Depending on the evolution of EFC's business and credit profile in the longer term, this could adversely affect the ratings of the notes.

RATING SENSITIVITIES
Rating sensitivity to increased weighted average foreclosure frequency (WAFF) (class A/B/C/D)
Current ratings: 'AAA(zaf)'/'AA(zaf)'/'A+(zaf)'/'A-(zaf)'
Increase base case by 15%: 'AAA(zaf)'/'AA-(zaf)'/'A+(zaf)'/'A-(zaf)'
Increase base case by 30%: 'AAA(zaf)'/'A+(zaf)'/'A+(zaf)'/'A-(zaf)'

Rating sensitivity to decreases in recovery rates (class A/B/C/D)
Current ratings: 'AAA(zaf)'/'AA(zaf)'/'A+(zaf)/'A-(zaf)'
Decrease base case by 15%: 'AAA(zaf)'/'AA-(zaf)'/'A+(zaf)'/'A-(zaf)'
Decrease base case by 30%: 'AAA(zaf)'/'A+(zaf)'/'A+(zaf)'/'A-(zaf)'

Rating sensitivity to shifts in multiple factors (class A/B/C/D)
Current ratings: 'AAA(zaf)'/'AA(zaf)'/'A+(zaf)'/'A-(zaf)'
Increase WAFF by 15%, decrease weighted average recovery rate (WARR) by 15%: 'AAA(zaf)'/'A+(zaf)'/'A+(zaf)'/'A-(zaf)'
Increase WAFF by 30%, decrease WARR by 30%: 'AAA(zaf)'/'BBB+(zaf)'/'BBB+(zaf)'/'BBB+(zaf)'

Key Rating Drivers and Rating Sensitivities are further described in the accompanying new issue report.

Data Adequacy
Fitch has checked the consistency and plausibility of the information it has received about the performance of the asset pools and the transactions. Fitch also conducted a review of a small targeted sample of the origination files and found the information contained in the reviewed files to be adequately consistent with the originator's policies and practices and the other information provided to the agency about the asset portfolio.

Overall, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.

Due Diligence Usage
Fitch was provided with due diligence information from Ernst and Young. The due diligence focused on the systems control environment at EFC, part of Eskom Holdings Ltd. Fitch reviewed this information which indicated errors or missing data related to the control environment. These findings were immaterial to this analysis.

Overall, Fitch's assessment of the asset pool information relied upon for the agency's rating analysis according to its applicable rating methodologies indicates that it is adequately reliable.

Sources of Information
The information below was used in the analysis.
-Loan-by-loan data provided by EFC as at 29 February 2016
-Transaction reporting provided by Maitland Group as at 29 February 2016
-Performance tape provided by EFC as of 29 February 2016