April 4 - Fitch Ratings has affirmed Sanlam Alternative Income Fund's (SAIF)
National Fund Credit Rating at 'AA-'(zaf). Fitch does not maintain a National
Fund Volatility Rating on the fund therefore its rating is 'V-NR'.
KEY RATING DRIVERS:
The affirmation of the Fund Credit Rating is driven by the fund's high and
stable credit quality, as reflected by the fund's weighted average rating factor
(WARF) and rating distribution.
Fitch's Fund Credit Ratings do not address any risk other than credit risk. In
particular, these ratings do not evaluate the impact of market risk on net asset
value (NAV) variations, and therefore do not provide an indication of the
stability of the fund's NAV. Importantly, the Fund Credit Rating does not
reflect the liquidity of the underlying assets. In Fitch's opinion, the
liquidity of preference shares, which account for around 80% of the fund's
investments as of February 2012, may be limited in some circumstances. However,
in Fitch's opinion, the fund's investment in liquid cash deposits or money
market funds (approximately 20% of the portfolio) mitigates liquidity risk.
Furthermore, 54% of the total portfolio can be liquidated in 90 days or less and
the put dates on the shares are short in some cases.
ASSET CREDIT QUALITY:
The weighted average credit quality of the fund is high and has remained
relatively stable over time, as indicated by the fund's stable WARF, which
incorporates the put dates on the fund's preference share investments. The
portfolio is primarily exposed to put providers in the 'AA(zaf)' rating
category. A considerable portion of the fund's portfolio had a Negative Outlook
as of March 2012, reflecting the revision of the Outlook on South Africa's
long-term Issuer Default Ratings to Negative in January 2012 and the resulting
impact on South African banks' rating Outlooks.
CONCENTRATION:
In Fitch's opinion, this fund is concentrated, with the top three issuer
exposures consistently in excess of 50% of portfolio holdings. Consistent with
the agency's applicable rating criteria, Fitch typically adjusts the
WARF-implied Fund Credit Rating of funds it deems concentrated down by one or
more notches.
The concentrated holdings of this fund reflect the limited number of eligible
issuers the fund can access. The fund's investment guidelines stipulate that all
investments must be rated 'A-(zaf)' or better. Maximum individual issuer
exposure is capped at 20% of the fund's assets, depending on maturity, credit
quality and liquidity. Fitch notes that on average, the fund invests
approximately 20% of its assets in money market funds. This provides a limited
diversification benefit to the fund, given that these funds and SAIF invest in a
substantially similar pool of issuers.
PORTFOLIO SENSITIVITY TO MARKET RISK:
The liquidity of the underlying assets is structurally constrained and therefore
the fund has a 'V-NR' Volatility rating. A 'V-NR' rating is assigned in certain
illiquid markets and/or asset classes where it may not be feasible to derive a
Volatility rating.
FUND PROFILE:
SAIF is a collective investment scheme established on 25 May 2007 as an
open-ended rand-denominated preference share conduit fund with the objective to
provide liquidity and capital preservation mainly through dividend-yielding
underlying assets. As of February 2012, its assets under management were
approximately ZAR7bn. It invests in plain vanilla unlisted cumulative,
variable-rate preference shares redeemable within three-to-five years of issue
and in money market funds. It may also invest in assets in liquid form, as
defined under South Africa's Collective Investment Schemes Control Act 2002. The
fund does not have any exposure to listed perpetual shares. The preference share
investments typically have put options written by institutions rated 'A-(zaf)'
or higher. The Fund Credit Rating has been affirmed on the basis of the agency's
understanding that the put options on the preference shares held by the fund are
unconditional, irrevocable, enforceable and expediently recoverable.
Fitch notes that changes to South Africa's taxation laws are being implemented,
which may affect preference shares. Fitch takes comfort from the legal advice
taken by the fund manager with regard to the preference shares in which it
invests, its efforts to restructure the portfolio in a manner consistent with
the revised legislation, the resumption of issuance of redeemable preference
shares in 2012 and the fund's stable investor base, including a healthy pipeline
of new investment.
THE ADVISOR:
The fund manager is Sanlam Collective Investments (SCI) and the co-investment
managers are Ora Fund Managers and Sanlam Structured Solutions (a division of
Sanlam Investment Managers). SCI was established in 1967 and is a full
subsidiary of Sanlam Limited ('AA-(zaf)'/Stable). At end-December 2011, SCI's
assets under management totalled ZAR78.6bn. The fund is regulated by the
Financial Services Board of South Africa and the Collective Investment Scheme
Control Act 2002.
RATING SENSITIVITY:
Funds in the 'AA'(zaf) rating category are considered to have high underlying
credit quality. The fund's assets are expected to maintain a weighted-average
rating of 'AA'.
The ratings assigned to the fund may be sensitive to material changes in the
fund's credit quality. A material adverse deviation from Fitch guidelines for
any key rating driver could cause Fitch to downgrade the ratings. Specifically,
if the fund's average credit quality, as measured by its WARF, exceeded 1.15
(disregarding asset maturity or put dates), the maximum level permitted in the
fund's investment guidelines, Fitch would expect to downgrade the fund based on
deteriorating credit quality combined with concentration risk.
The ratings may also be sensitive to the evolving regulatory situation in South
Africa. Should changes to applicable regulation negatively impact the fund,
Fitch may downgrade the Fund Credit Rating in a manner consistent with the
fund's current and prospective credit quality. Fitch is closely monitoring the
evolving regulatory situation in South Africa and the actions taken by the fund
manager to comply with applicable regulation.
Additional information is available at www.fitchratings.com. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
The sources of information used to assess this rating were the public domain,
Ora Fund Managers, Sanlam Structured Solutions and SCI.
Applicable criteria 'Global Bond Fund Rating Criteria', dated 16 August 2011, is
available at www.fitchratings.com.
Note to Editors: Fitch's National ratings provide a relative measure of
creditworthiness for rated entities in countries with relatively low
international sovereign ratings and where there is demand for such ratings. The
best risk within a country is rated 'AAA' and other credits are rated only
relative to this risk. National ratings are designed for use mainly by local
investors in local markets and are signified by the addition of an identifier
for the country concerned, such as 'AAA(zaf)' for National ratings in South
Africa. Specific letter grades are not therefore internationally comparable.
Applicable Criteria and Related Research:
Global Bond Fund Rating Criteria
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