Last Thursday JPMorgan closed South Africa's very first MBS deal - only the second public securitization emanating from the country. Standard Bank of South Africa was the joint book manager.

The benchmark transaction, which could possibly open the floodgates for further domestic securitizations, also marked the first time that Moody's Investors Service rated a deal in South Africa on a domestic-scale basis, rather than a foreign-currency basis.

Moreover, in a country where investor mandates usually do not go below the double-A level, the success of the oversubscribed dual-tranched transaction (one triple-A tranche, one triple-B tranche) is expected to facilitate local investors' ability to get credit approval to take lower-rated tranches. In fact, the B tranches were more oversubscribed then the A's, one source close to the transaction noted.

The 1.25 billion rand (approximately $125 million) offering, Thekwini Fund 1 Limited, securitizes floating-rate first-lien mortgages from South Africa Home Loans, a three-year-old company, and boasts very high portfolio quality, with an average LTV of 60% on the portfolio. The bonds were sold entirely to South African investors, predominately insurance companies. However, banks, asset managers and some public pension funds also participated.

According to market sources, SA Home Loans, a discount lender, viewed this endeavor as an opportunity to undercut the big banks, who tend to overcharge borrowers. "South Africa is controlled by the major banks," a source said. "SA Home Loans saw this as an opportunity to target very high quality borrowers who are focused on price and service. There is a feeling of discontent with large banks, who often gouge customers."

The spread on the deal was wider than where the country's sovereign debt comes; a Class A piece, for 1.15 rand, with a WAL of 3.3 to 3.5 years, was rated triple-A (Moody's/Fitch) on the domestic-scale ratings and priced at three-month JIBAR plus 70. The Class B, for 100 million rand ($9.8 million), had a WAL of four years (with a step-up in call for year four), was rated Baa2/BBB-flat (M/F) and had a coupon of three-month JIBAR plus 230 basis points.

An opportunity

for local investors

Usually, for foreign-currency deals, an issuer will have a local currency rating, and could also have a foreign currency rating, which is typically lower than the local rating. However, in this case, because of the high-quality portfolio and the fact that the bonds were being sold to local investors, Moody's rated only on a domestic-scale basis.

According to sources close to the deal, the offering was particularly appetizing to investors: the South African government is rated triple-A on a domestic basis and has recently been reducing its debt issuance, sources said. "For investors, this has created a gap for what they could buy at the high end," said the source. "Therefore, the availability of triple-A paper with this deal was quite attractive to them."

Despite the fact that many outsiders consider the South African debt market to be an "emerging" market, the local market is more developed than one might assume. With a group of approximately 50 core investors of varying sizes, the investor base, while small, has a lot of potential for both the triple-A and triple-B markets, sources said. "Both mortgage issuers and investors wanted to see how this deal went, because it was mandated for some time," a market source noted. "They wanted to go to school on someone else's experience."

The only factor holding up the country's 200 billion rand ($19.6 billion) mortgage market from pursuing securitization full-force is the current status of new securitization regulations, which have been sitting with the South African ministry for quite awhile (see ASR 10/01/01 p.1). While passage of the laws are expected over the near-term, the recent changes to Basel (see story p. 1) will also play a role in the future of South African securitizations.

The SA Home Loans deal was the second public securitization out of the country; surprisingly, the first one - also led by JPM - was a CDO completed in 1999 called Kiwane. "It's interesting that a CDO, which plays to relatively experienced and sophisticated investors, was the first ABS done in the country," the source added.

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