NQABA FINANCE 1 (RF) LIMITED - Response to Moodys Rating Action dated 27 May 2019 - NQA

Response to Moody’s Rating Action dated 27 May 2019 - NQA

NQABA FINANCE 1 (RF) LIMITED
Registration Number 2005/040050/07
(JSE Alpha code: NQA)
(“NQABA")


Nqaba Finance 1 (RF) Limited (Nqaba) – Response to Moody’s Rating Action dated 27 May
2019

A meeting of the Nqaba Finance 1 (RF) Ltd (Nqaba) Noteholders has been called to provide
detailed information about Moody’s rating action released 27 May 2019 and Nqaba
management’s (Management) response to it. This announcement serves to provide Noteholders
with more information relating to the Moody’s rating action, and an update of actions undertaken
to date to address the situation.

Moody’s rating action

On 27 May 2019, Moody’s placed on review for downgrade all Notes issued by Nqaba Finance 1
(RF) Limited which it has rated.

The rating action reflects Moody's increased uncertainty regarding the data quality in the
transaction, and effectiveness of transaction governance.

Moody’s has received an Agreed?Upon?Procedure (AUP) performed in November 2016 despite
the subsequent annual refinancing. The percentage of mortgages in the outstanding portfolio not
subject to an AUP will increase with time given the revolving nature of the transaction, with
recurrent refinancing.

If sufficient information is not received over the next 60 days, Moody’s will consider taking
appropriate rating action which could include the withdrawal of the ratings.

On 22 May 2019, Moody's did not confirm the rating of the existing Notes in issue.

Data quality

Subsequent to the 2016 AUP, Eskom appointed Nkonki Inc. to complete an AUP in 2018. The
AUP was completed, but Nkonki Inc went into voluntary liquidation before the audit report was
signed.

-   For the current AUP, Eskom put out a tender for the audit service in January 2019. Only 2
    audit firms responded. One of the firms did not have the capability to perform the AUP and
    the second firm withdrew from the process.
-   Thereafter Eskom embarked on a second tender process and received no interest from the
    market.

-   As a result, Nqaba was unable to provide the AUP report to Moody’s in a timely fashion.

Effectiveness of transaction governance

Management believes that Moody's concern in respect of the effectiveness of transaction
governance could relate to the strength of protection provided by the existing portfolio covenants,
as well as an early amortisation trigger reported in the Investor report that did not appear to be
included in the registered Programme Memorandum.

-   The trigger reported in the Investor Report relates to a new trigger proposed in 2017 to
    replace the Eskom ratings trigger;

-   This trigger aimed to link the ratings of the A-Class Notes issued by Nqaba, but investors did
    not support delinking the Eskom Rating;

-   Wording of the proposed new trigger event was marked-up in the Programme Memorandum
    but never approved;

-   A black-line version of the Programme Memorandum was used that contained this wording to
    compile the investor report, which consequently made incorrect reference to this trigger that
    was never implemented;

-   In addition to this, the Eskom ratings trigger was linked to the Eskom Domestic Medium Term
    Note Programme, which is Government guaranteed. Moody’s do not assign ratings to that
    programme. It was Moody’s view that the trigger was thus ineffective and provided no
    protection to investors.

Actions undertaken by Nqaba

Eskom Finance Company SOC Ltd, in consultation with and under direction from the Nqaba
board of directors, has devised an action plan to address the above concerns within the next 60
days. In particular:

-   Nqaba’s external auditor, SNG Grant Thornton, has been appointed to conduct the required
    AUP. The audit is presently underway, having commenced on 3 June 2019 and is being
    conducted on 470 randomly-selected mortgage loans;
-   The Investor report is being aligned to the Programme Memorandum. The incorrect trigger
    event reported on has been removed from the report; and

-   Nqaba is considering possible strengthening of the portfolio covenants to increase investor
    protection. These will be presented to the Noteholders at the meeting set for 25 th of June
    2019 for discussion and consideration, however no vote will be tabled at this meeting. Should
    the issuer wish to effect amendments the Programme Memorandum, including any
    amendment to the portfolio covenants, such amendments will remain subject to compliance
    with all applicable procedural requirements and the obtaining of the required consents and
    approvals, including from regulatory authorities and the Rating Agency, whereafter such
    amendments will be formally presented to the Noteholders for a vote.



For further information, please contact:
Eskom Finance Company SOC Ltd
Megawatt Park
Maxwell Drive
Sunninghill
2157
Ettienne Bester
Tel +27 11 800 5405
Email: besteret@eskom.co.za

Johannesburg
18 June 2019

Debt Sponsor
Absa Bank Limited (acting through its Corporate and Investment Bank division)

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