Fitch Ratings has affirmed Scottish Equitable plc’s (Scottish Equitable) GBP250m value of in-force (VIF) securitisation fixed-rate loan notes due 2023 at ‘A’. The affirmation reflects the performance of the transaction, which is in line with Fitch’s expectations.
The transaction, referred to as ‘Zest’, is a securitisation of the future profits arising from a book of unit-linked pensions business. Scottish Equitable is the principal UK subsidiary of AEGON N.V. (AEGON; ‘A’/ Stable).
The issued notes do not benefit from a financial guarantee insurance policy and there is no recourse to Scottish Equitable.
Although the transaction is a contingent loan with no recourse to the sponsor, the rating of the notes has been established under Fitch’s Corporate Finance methodology. This is because in Fitch’s opinion, the transaction has no significant structured finance elements.
KEY RATING DRIVERS
The rating is based on analysis of the transaction documents, the volatility of underlying profit sources, and analysis of the transaction’s expected cash flows. Fitch’s rating process at the outset of the transaction included a review of the embedded value methodology, assumptions and actuarial model developed by Scottish Equitable. Tillinghast, an actuarial consulting firm of Towers Watson, independently reviewed the model and the assumptions used. These assumptions are updated on an annual basis by AEGON and reviewed by Fitch.
The transaction currently has GBP15m of principal outstanding. As the transaction generates approximately GBP60m annually, Fitch expects the transaction to be fully repaid in 2014, unless there is an extraordinary event outside of the ‘A’ range, such as an extreme lapse shock or an extreme fall in asset values. This is in line with Fitch’s initial base case projections and expectations for the rating level. The total surplus emerging over the life of the transaction to end-2012 has been negatively affected by market performance, but boosted by tax changes and favourable lapse experience.
Zest’s performance in 2012 was better than expected due to favourable lapse experience and investment market performance.
RATING SENSITIVITIES
Zest could be subject to a downgrade if, in Fitch’s opinion, future cashflows are unlikely to be sufficient to cover the repayment of the loan and interest payments under a ‘A’ stressed scenario or if the transaction underperforms by more than GBP15m in one year or GBP30m on a cumulative basis. The transaction could also be downgraded if Fitch’s opinion of Scottish Equitable’s credit quality deteriorates.
