GCR Downgrades Sterling Bank Sponsored SPV Bonds Series
An emerging market-focused ratings firm, GCR, has lowered the ratings of Sterling Investment Management SPV Plc.’s Series 1 and 2 Bonds by one notch to BBB-(NG), with the outlook revised to stable from negative.
The rating report from the agency said Sterling Investment Management, a special purpose vehicle (SPV) was sponsored by Tier 2 Nigerian lender, Sterling Bank Plc. According to GCR Ratings, the Series 1 and Series 2 Bonds were issued under Sterling Investment Management SPV Plc.’s N65 billion Debt Issuance Programme.
It noted the Bonds constitute direct, unsecured, and senior obligations of the Issuer and rank pari passu without any preference among themselves, and with every other senior obligation of the Issuer.
It said the transaction mechanics entail the use of the proceeds of the issuance of Sterling SPV Series 1 and Series 2 Bonds to purchase -with up to 60% of the proceeds- Subordinated Notes issued by Sterling Bank Plc.
The remaining 40% is expected to be held in the Debt Service Reserve Fund (DSRF) and invested in Federal Government of Nigeria Securities. All subordinated notes’ debt servicing payments received from the issue date are also to be held in the DSRF and used to meet the obligations of the Issuer, GCR added.
The Ratings firm hinted that the Bonds are backed by an irrevocable and unconditional undertaking under the deed of undertaking between the sponsor and the Issuer.
However, under the GCR applicable criteria, the Ratings said the overall recovery prospect provided by the credit enhancement in a default scenario was insufficient for a rating uplift on an expected loss basis.
GCR Ratings said while the issuer is Sterling SPV, repayment of the obligations under the issues ultimately depends on the performance of the sponsor – Sterling Bank Plc, as the direct obligor of the Issues.
It said the accorded rating is linked to Sterling’s credit standing and financial position, and, as such, a notch below the sponsor’s long-term national scale issuer credit rating.
GCR considers the fact that the Bonds largely rank alongside the subordinated notes issued by the Sterling Bank Plc which was accorded a long-term national scale issuer credit rating of BBB (NG), with a stable outlook in July 2021.
“The downgrade of the bonds does not reflect a change in the performance of the Bonds or the bank, nor does it reflect a change in the probability of default, rather due to criteria change”, GCR said.
However, the Ratings firm noted the rating action now reflects the subordination of the Bonds -due to the majority of the underlying assets being Sterling’s Subordinated Notes- and expectations that the notes carry a higher loss given default.
According to the periodic performance reports provided to GCR by the Trustees to the Bondholders dated September 14, 2021, in respect of the Series 1 Bonds and June 30, 2021, in respect of the Series 2 Bonds, the Issuer has been meeting all its obligations on a timely basis on both the Series 1 and 2 Bonds, the firm explained.
In addition, it highlighted that the stable outlook reflects GCR’s opinion that the sponsor will maintain a good financial profile amidst the challenging operating environment.
“We expect Sterling’s asset quality indicators – non-performing loans ratio and credit losses- to be maintained at the current levels over the next 12 months”, GCR stated.
Also, the anticipated growth in risk-weighted assets is expected to be balanced by strong internal capital generation, mitigating downward pressure on the Sponsor’s capitalisation over the rating horizon, it added.
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