South Africa goes synthetic

South Africa’s nascent securitisation market has seen its first two synthetic transactions in recent weeks. First Rand Bank issued a R12.5 billion ($1.2 billion) synthetic collateralised loan obligation (CLO), called Fresco 1, on May 20. It was the country’s first synthetic and the largest rated securitisation in South Africa to date. WesBank, a division of First Rand Bank and one of the biggest originators of auto loans in South Africa, followed up with a R2 billion synthetic auto loan securitisation – South Africa’s first – called Procul on June 12.

First Rand, which is one of the four largest banking groups in South Africa, issued R1,082 million of rated notes on the portfolio in six tranches. The bank retained the R11.25 billion AAA rated super-senior tranche via a portfolio credit default swap. The deal included a BB tranche, the first sub-investment-grade bonds to be listed on the Bond Exchange of South Africa.

The synthetic deals are a fillip for South African investors who have, so far, had a limited choice of investments. “The corporate bond market has not yet taken off in South Africa as we don’t have a ratings culture here,” says Boshoff Grobler, transaction specialist in the structured products division at Rand Merchant Bank, the First Rand subsidiary that structured the synthetic transactions.

Slow start
The South African securitisation market has had a slow start due to regulations, repealed last year, which prevented non-bank institutions from issuing securitisations. Originators were also unable to retain the equity or enter any type of hedge agreement with the special-purpose vehicle. A new securitisation law passed in December 2001 enabled corporates to issue securitisations and expanded the range of activities allowed for an originator.

Both of the deals were regulatory capital transactions. Rand officials say they were well received by investors, mainly pension funds and fund managers, Grobler says. Both were nearly two times oversubscribed, he adds. The 107 corporate names, mostly South African, underlying the Fresco portfolio provided investors with a strong source of diversification. However, it posed special problems for the ratings agencies.

“Of the 107 names, Fitch had only rated 58,” says Alexander MacKay, senior analyst at Fitch, which rated the deal. “So Fitch took the 58 rated names and used regression analysis to fill in the gaps using Rand’s own internal rating system.”
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