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

ZAR303m Class A19 FRN: 'AAA(zaf)(EXP)'; Outlook Stable
ZAR8m Class B17 FRN: 'AA(zaf)(EXP)'; Outlook Stable
ZAR5m Class C17 FRN: 'A+(zaf)(EXP)'; Outlook Stable

The final ratings are contingent on the receipt of final documents conforming to information already received. Fitch expects to affirm Nqaba Finance 1's existing tranches when the final ratings are assigned.

The new notes will be used to refinance the existing class A15, B14 and C14 notes, which have a scheduled maturity of 22 May 2015. All other existing notes will remain after the refinance date of 22 May 2015.

Credit enhancement will be provided by overcollateralisation and total 26% for the class A notes, 21.33% for the class B notes, 17.9% for the class C notes and 14.87% 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 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.

The historical performance of these assets is strong relative to the rest of the South African mortgage market, with 90 days delinquency rates of 0.7% as of end-February 2015. This strong performance is due to borrowers' stable employment background and the collection of mortgage payments through payroll deduction. As of end-February 2015, 94.3% 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 paid 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 SPVs accounts.

However, 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 (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)'/'BBB(zaf)'
Increase base case by 30%: 'AAA(zaf)'/'AA(zaf)'/'A-(zaf)'/'BBB-(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)'/'BBB(zaf)'
Decrease base case by 30%: 'AAA(zaf)'/'AA-(zaf)'/'A-(zaf)'/'BB+(zaf)'

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

Key Rating Drivers and Rating Sensitivities are further described in the accompanying pre-sale report.