OREANDA-NEWS. Fitch Ratings has assigned Fox Street 3 (RF) Limited (Fox Street 3) the following National Ratings:

ZAR100m class A1 notes: 'F1+(zaf)'
ZAR200m class A2 notes: 'AAA(zaf)'; Outlook Stable
ZAR200m class A3 notes: 'AAA(zaf)'; Outlook Stable
ZAR200m class A4 notes: 'AAA(zaf)'; Outlook Stable
ZAR965m class A5 notes: 'AAA(zaf)'; Outlook Stable
ZAR155m class B1 notes: 'A-(zaf)'; Outlook Stable
ZAR40m class C1 notes: 'BBB(zaf)'; Outlook Stable
ZAR90m class D1 notes: 'BB-(zaf)'; Outlook Stable
ZAR173.8m subordinated loan: not rated

Fox Street 3 is a securitisation of mortgage loans granted by Investec Bank Limited's (Investec, A+(zaf)/Stable/F1(zaf)) to its private banking clients in South Africa. This is Investec's ninth standalone South African RMBS transaction. About half of the portfolio consists of loans originated by Investec and previously securitised on other transactions, due to prepay.

Credit enhancement (CE) is provided by overcollateralisation and various cash reserves, and at closing represents 22.9% for the class A5 notes, 15.1% for the class B1 notes, 13.1% for the class C1 notes and 8.7% for the class D1 notes. As a result of repayment subordination, the class A1 to A4 notes benefit from higher CE than the class A5 notes.

The class A1 notes mature only 12 months after closing and bear a short-term rating; the class A2, A3 and A4 notes mature three, five and seven years after closing, respectively. However, in Fitch's opinion, these notes can be repaid by their legal final maturity under prepayment rate assumptions significantly below historical observations. In addition, the ZAR40m capital reserve can be used by the administrator to redeem principal of the notes at its discretion.

KEY RATING DRIVERS
Robust Asset Performance and Underwriting
The historical performance of Investec's mortgage loan book is better than the market average for South Africa. In Fitch's opinion, this is due to the credit profile of Investec's private banking clients, and its established underwriting practices. The agency has considered this by applying a 10% downward lender adjustment to the default probability at 'B(zaf)'.

Bespoke Customer Profile
All borrowers are Investec's private banking clients, who typically earn more than ZAR800,000 per year, or are professionals with high future expected incomes. These customers tend to have higher leverage than standard prime borrowers but are likely to have a lower risk profile and to pay down their loans more quickly.

Large Properties and Loan Exposures
The portfolio consists of larger than average loans secured by higher-value properties. Fitch has made relevant adjustments in line with its criteria to address the risk of higher sale discounts.

Interest-Constrained Structure
The transaction has a strict separation of the interest and principal priority of payments (PoP), which could result in shortages in the interest PoP should performance deteriorate. The liquidity reserve mitigates this risk, but once it is depleted it is unlikely to be replenished with interest proceeds (from underlying assets) alone. This constrains the notes' ratings (except the class A notes) and explains the difference between the CE and portfolio losses assumed by Fitch for each rating scenario.

Originator Could Call Notes at Loss
The originator has the option to repurchase notes from 60 months after closing (except for the class A1 and A2 notes) at their outstanding principal (plus accrued interest) minus any amount written on the principal deficiency ledger (PDL) as of the call date. Losses that could otherwise cure may crystallise as a result of the call option. Based on the stressed cash flow analysis, Fitch considers the additional note losses potentially resulting from this feature as remote. In addition, these losses are not expected on the class A notes, even under a 'AAA(zaf)' scenario, as Fitch does not expect the class A to have a positive PDL.

Stable Asset Outlook
Fitch expects stable mortgage performance in the medium term. The agency also expects nominal housing appreciation to slow over the coming years, and to align with consumer inflation, which is also on a downward trend. In Fitch's view, the industry has made significant progress in working out the defaults inherited from the crisis years of 2008 and 2009. The possibility of a sharp rise in interest rates has reduced as a result of falling oil prices and receding inflation, although a further slowdown in the economy represents a risk to mortgage performance and the housing market.

RATING SENSITIVITIES
Material increases in the frequency of defaults and loss severity on defaulted receivables could produce loss levels higher than Fitch's base case expectations, which in turn may result in potential rating actions on the notes. Some examples of sensitivities to the foreclosure and recovery rates are below. The ratings for the class A notes below only refer to the sub-class A5 notes. More senior sub-classes are less sensitive to the changes assumed below.

More detailed model implied ratings sensitivity can be found in the new issue report available at www.fitchratings.com.

Rating sensitivity to increased foreclosure rate (class A/B/C/D)
Current ratings (base case: 6.8%): 'AAA(zaf)'/'A-(zaf)'/'BBB(zaf)'/'BB-(zaf)'
Increase base case by 15%: 'AA(zaf)'/'BBB(zaf)'/'BBB-(zaf)'/'B+(zaf)'
Increase base case by 30%: 'AA-(zaf)'/'BBB-(zaf)'/'BB+(zaf)'/'B(zaf)'

Rating sensitivity to decreased recovery rate (class A/B/C/D)
Current ratings (base case: 80%): 'AAA(zaf)'/'A-(zaf)'/'BBB(zaf)'/'BB-(zaf)'
Decrease base case by 15%: 'AAA(zaf)'/'A-(zaf)'/'BBB-(zaf)'/'B+(zaf)'
Decrease base case by 30%: 'AAA(zaf)'/'A-(zaf)'/'BB+(zaf)'/'B(zaf)'

Rating sensitivity to increased foreclosure rate and decreased recovery rate (class A/B/C/D)
Current ratings: 'AAA(zaf)'/'A-(zaf)'/'BBB(zaf)'/'BB-(zaf)'
Increase foreclosure rate by 15% and decrease recovery rate by 15%: 'AA(zaf)'/'BBB+(zaf)'/'BB+(zaf)'/'B(zaf)'
Increase foreclosure rate by 30% and decrease recovery rate by 30%: 'AA-(zaf)'/'BBB-(zaf)'/'BB-(zaf)'/'NR(zaf)'