(The following was released by the rating agency)
-- Standard & Poor’s has conducted a review of the Short-Term Note Program and Euro Commercial Paper Program by Colonial First State Investments Ltd. in its capacity as responsible entity for Colonial First State Wholesale Geared Share Fund.
-- We affirmed the ‘A-1 (sf)’ ratings on the asset-backed commercial paper issued under both programs.
MELBOURNE (Standard & Poor‘s) March 1, 2012--Standard & Poor’s Ratings Services today affirmed its ‘A-1 (sf)’ ratings on the asset-backed commercialpaper (ABCP) issued by Colonial First State Investments Ltd. The ABCP was issued by Colonial First State Investments Ltd. under the Short-Term Note Program and Euro Commercial Paper Program in its capacity asresponsible entity for the Colonial First State Wholesale Geared Share Fund. The Short-Term Note Program consists of short-term notes and extendible short-term notes.
The ABCP notes rely on a number of means for repayment, including refinancing, liquidation of the fund’s assets, and drawing on available liquidity. The ratings reflect our opinion that if the fund’s assets were required to be liquidated to repay the ABCP, the asset could withstand our ‘A-1 (sf)’ stress assumptions and still meet the repayment obligations of the ABCP notes, which rank pari passu to other unsecured creditors of the fund. The rating only applies to the ABCP and does not comment on the overall credit quality or performance of the fund or any other financial indebtedness of the fund.
We believe the fund’s assets could withstand at least 125% of the ASX stock market correction experienced in October 1987 and still meet its liabilities. A number of factors have contributed to our analytical outcome, of which the key ones are:
-- The fund’s constitution, investment guidelines, compliance procedures, and risk-control parameters, which require proactive management of the fund’s assets and liabilities.
-- The fund management’s demonstrated discipline and track record of adhering to the guidelines and procedures in its 15 years of history, particularly the proactive management of the fund’s overall gearing to the lower gearing ratio determined by an income-cover test or an internal target of 55%, with a usual tolerance of 5%, on a daily basis.
-- The fund’s asset portfolio consists mostly of highly liquid stocks listed in the S&P/ASX 100, of which close to 85% are stocks listed in the S&P/ASX 50. The portfolio is required to be diversified by industry and stock, with the remaining assets held as cash for liquidity management.
-- The fund’s debt funding, which all ranks pari passu, has the flexibility to be repaid at short notice, either through direct repayment or via secondary market repurchases of outstanding ABCP notes. This enables a responsive deleveraging by the fund in response to stock market movements to maintain the targeted gearing ratio.
The ABCP benefits from a committed liquidity support of a minimum of 50% of ABCP notes outstanding (excluding extendible short-term notes) for redemption at maturity, provided by financial institutions with a short-term rating of at least ‘A-1 (sf).’ This is different to traditional 100% liquidity supported ABCP due to the liquid nature of the underlying assets.
A unique feature of the ABCP by this fund is that it is unsecured. Instead, the transaction documents include negative pledges that prohibit the issuer from creating security interest (other than a permitted encumbrance) that would rank ahead of the ABCP. In the event of the fund’s liquidation, its assets must be used to discharge any indebtedness before net proceeds are distributed to unit holders. The ABCP noteholders and other senior creditors all rank pari passu.
Being an open fund, a redemption run could occur, potentially eroding the fund’s “capital” position. In ordinary market conditions, we believe the dynamic management of the fund’s gearing ratio should mitigate the risk. In the case of a major market correction, the risk would be mitigated by the fund’s debt profile, which allows for a responsive deleveraging before applying any funds towards unit holder redemptions. Furthermore, unit holder redemptions must be suspended if the fund’s gearing exceeds 75% for one business day.
Standard & Poor’s has published a request for comment for rating market value securities (see “Request for Comment: Methodology And Assumptions For Market Value Securities,” Aug. 31, 2010). Given the structural features and dynamic gearing management of the transaction, our analysis extends beyond the request for comment and applies the principles of assigning ratings to structured finance securities (see “Principles of Credit Ratings,” Feb. 16, 2011).
Standard & Poor’s 17g-7 Disclosure Report
SEC Rule 17g-7 requires an NRSRO, for any report accompanying a credit rating relating to an asset-backed security as defined in the Rule, to include a description of the representations, warranties and enforcement mechanisms available to investors and a description of how they differ from the representations, warranties and enforcement mechanisms in issuances of similar securities. The Rule applies to in-scope securities initially rated (including preliminary ratings) on or after Sept. 26, 2011. If applicable, the Standard & Poor's 17g-7 Disclosure Report included in this credit rating report is available here.
-- Principles of Credit Ratings, Feb. 16, 2011
-- Criteria: Counterparty and Supporting Obligations Update, Jan. 13, 2011
-- Criteria: Counterparty and Supporting Obligations Methodology and Assumptions, Dec. 6, 2010
-- Request for Comment: Methodology and Assumptions for Market Value Securities, Aug. 31, 2010