The practice of voluntary asset buy-backs is prompting Fitch Ratings to keep several RMBS transactions in South Africa on Rating Watch Negative (RWN), the agency said in a report looking at the expected performance of the country’s structured finance sector this year.
Fitch cited “lessons learned globally” among the reasons for the outlook.
Typically voluntary buy-backs target non-performing loans. While they improve a deal’s figures by plucking out the weakest collateral, they also mask “true” performance. In Fitch’s view, “originators should be transparent about the use of buy-backs in the investor reporting. The agency is incorporating the impact of buy-backs in the ongoing rating analysis and monitoring process, which will continue to influence certain SF sector rating outlooks.”
Less standardized than mandatory buy-backs, the voluntary kind is seldom spelled out by a deal’s documentation, and therefore can imply a high level of sponsor discretion. The practice exists to varying degrees in emerging markets such as Brazil. In the case of South Africa, “Fitch believes that the avoidance of a breach of an early amortization trigger is often a motivation for voluntary buy-backs.”
The global financial crisis in 2008-09 took the wind out of the once-brisk market for securitizations in South Africa, and it has struggled to come back. Fitch sees placements for ABS and MBS totaling ZAR3 billion ($424 million) this year, about the same as in 2010. The market peaked at ZAR41 billion in 2007.
A PDF of the Fitch report is attached.