NEW YORK--(BUSINESS WIRE)--Kroll Bond Rating Agency (KBRA) assigns an issuer rating of BBB and short-term issuer rating of K2 for South Street Securities, LLC (“SSS” or “the Firm”), an SEC registered broker dealer headquartered in New York, NY, with a nearly exclusive focus on repo business. The Outlook for the long-term issuer rating is Stable.
A wholly-owned subsidiary of South Street Securities Holdings, Inc., SSS is a repo-centric broker-dealer firm founded in 2001 by an experienced group of executives who previously ran repo operations for a money center bank. SSS is governed by formal operating agreements with specific limitations and wind-down provisions and is considered bankruptcy remote from all other affiliated entities. Additionally, the Firm is the only repo-centric FICC member with Tier 1 netting rights.
SSS operates a matched repo book which totaled approximately $35 billion as of June 30, 2018, and recently reflected approximately 35 active counterparties. SSS’ repo book is backed mainly by U.S. government treasury and agency securities. KBRA notes that the vast majority of the Firm’s transactions are cleared through tri-party at Bank of New York or the Fixed Income Clearing Corporation.
The assigned ratings for South Street Securities, LLC reflect the strength of the Firm’s management team with noted expertise in developing and managing all aspects of a repo-oriented operation, as well as the strength of its board of directors, which includes a number of experienced and well-connected Wall Street veterans. KBRA considers risk management to be very comprehensive due, in part, to the operating agreements that provide stringent guidelines for various risk measures. Operational infrastructure, including the single-entry front-to-back trading platform is considered best in class.
Owing to the typically thin margins realized in the repo business, particularly those collateralized by government securities, earnings power for SSS is considered somewhat muted as compared to more traditional securities firms. Despite lower net interest income, returns have been enhanced due to the significant amount of balance sheet leverage. In this regard, SSS has consistently operated with reported assets representing in excess of 175x of its equity base. However, considered in the context of the excess net collateral haircuts that emerge through the Firm’s business activities, the analytically more relevant “adjusted” leverage, inclusive of this de facto buffer, scales to an approximately 60x measure, which KBRA considers palatable given the low risk nature of the business lines of SSS. Further, the Firm’s liquidation value approach to capital management, inclusive of wind-down expense, is considered adequate given the low-risk nature and structure of the balance sheet. Given the collateral backing the repo book, liquidity is considered very strong, supported in part, by daily management of funding gap, which is actively hedged through various futures contracts.
As noted, the Outlook for the issuer rating is Stable and reflects KBRA’s view of consistent performance and operation over the medium term. Drivers of a positive change in KBRA’s view of the Firm over time would include, though not be limited to, a meaningful improvement in the relative capital, or similarly, the leverage profile of the Firm, coupled with an increase in market share and/or a diversification of revenue streams to encompass other sources without a substantial increase in the Firm’s overall risk profile. Conversely, any perceived increase in the Firm’s risk appetite, including elongation in the funding gap of the repo book, or expansion of the repo book into less liquid asset classes, could negatively impact the ratings for SSS. Further, unforeseen market-driven events that materially impact the Firm’s risk profile, including deterioration in capital levels, earnings, or the asset quality of the repo book, while highly unlikely, may put downward pressure on the ratings.
In accordance with KBRA’s rating practices, an issuer rating of BBB corresponds to a short-term credit rating of K2, indicative of the issuer’s strong ability to meet short-term obligations and reflects our view of SSS’ highly liquid, short duration balance sheet.
The ratings are based upon KBRA’s Securities Firm Global Ratings Methodology dated March 8, 2018.
CONNECT WITH KBRA
Twitter
LinkedIn
Download
the iOS App
YouTube
About KBRA and KBRA Europe
KBRA is a full service credit rating agency registered with the U.S. Securities and Exchange Commission as an NRSRO. In addition, KBRA is designated as a designated rating organization by the Ontario Securities Commission for issuers of asset-backed securities to file a short form prospectus or shelf prospectus, is recognized by the National Association of Insurance Commissioners as a Credit Rating Provider, and is a certified Credit Rating Agency (CRA) by the European Securities and Markets Authority (ESMA). Kroll Bond Rating Agency Europe Limited is registered with ESMA as a CRA.
