Johannesburg, 19 July 2018 — Global Credit Ratings (“GCR”) has accorded indicative, public long-term national scale credit ratings of ‘AA-(ZA)’ with ‘Stable’ outlooks to the APFC01, APF08 and APF09 Secured Notes to be issued by Accelerate Property Fund Limited (“Accelerate”) in July 2018. Concurrently, GCR has affirmed the final, public long-term national scale credit ratings of ‘AA-(ZA)’ with ‘Stable’ outlooks accorded to the APF02, APF04, APF05, APF06 and APF07 Senior Secured Notes previously issued by Accelerate.
The APFC01 Secured Notes will be short-term Notes and hence will carry the short-term corporate rating of the Issuer, i.e. ‘A2(ZA)’. Collectively, the APFC01, APF08 and APF09 Notes will be referred to as the “New Notes” in this report, while the APF02, APF04, APF05, APF06 and APF07 Notes will be referred to as the “Existing Notes.” However, the New Notes and the Existing Notes will collectively be referred to as the “Senior Secured Notes”.
The New Notes will be issued to refinance the R452m APF03 Notes which are scheduled to mature on 7 August 2018, with any amount in excess of the refinance amount, up to an aggregate issuance of R600m, to be utilised for general capital requirements. The indicative and final, public ratings accorded to the Senior Secured Notes relate to the ultimate payment of interest and principal (as opposed to timely, akin to an expected loss rating, which is a function of probability of default and loss severity) by the final maturity date of the Senior Secured Notes, respectively.
SUMMARY RATING RATIONALE
Accelerate is a mid-sized Real Estate Investment Trust (“REIT”) that listed on the JSE in December 2013. As at FY17, the fund reported a portfolio with 69 properties for a total value of R11.8bn (FY16: R8.5bn). As the fund has attained scale, the portfolio shows greater diversity, but remains concentrated with respect to its top-tier properties (5 largest assets represented a combined 48% of the total investment pool value). This is mitigated by the quality of the assets, given their prime locations (with critical mass attained in certain nodes) and generally high occupancies leased to a diversified and good quality tenant base.
The fund’s rental income exceeded the R1bn mark in FY17 and reflects a favourable long-term lease profile (WALE: 5.6 years), with average escalations of 6.9% (FY16: 8%). Nonetheless, overall core vacancies remain relatively high (particularly for a retail orientated fund), indicating scope to enhance yields and thus earnings generation. GCR affirmed Accelerate’s local currency national scale corporate credit ratings of ‘BBB+(ZA)’ and ‘A2(ZA)’ on the long and short-term respectively, with a Stable Outlook, in August 2017. Secured bond ratings are long-term ratings and as a result, the APFC01 Notes cannot be assigned a short-term secured bond rating, given their short-term tenor. However, these notes will ultimately bear the short-term corporate credit rating of the Issuer.
The Senior Secured Notes, together with the Permitted Term Facilities and Permitted Hedging Facilities are currently secured against 41 properties of the Issuer (the “Secured Properties”), with an aggregate open market valuation of R7.5bn. The Senior Secured Noteholders, the Permitted Term Facility Providers and the Permitted Hedging Facility Counterparty (collectively the “Secured Lenders”) will share pro rata in the underlying security (being the first ranking mortgages in favour of the Security SPV over the Secured Properties and a cession of all the Issuer’s lease agreements and insurance policies relating to the Secured Properties).
The rating of the New Notes and Existing Notes is derived by applying a notching approach, starting from the long term, ‘BBB+(ZA)’, senior unsecured, corporate credit rating of the Issuer. A rating uplift of four national scale notches was deemed to still be appropriate for the Transaction, given the “Superior Recovery Prospects”. GCR calculated the recoveries at the maximum debt that can be drawn down under the Security SPV Loan to Value covenant of 45%. Should overall estimated recovery rate calculations decline to the lower end of the recovery range, then the ratings accorded to the Senior Secured Notes may potentially be notched downwards.
For more information on the Transaction and ratings accorded to the Senior Secured Notes, please refer to the “Accelerate Property Fund – Senior Secured Notes Pre-Funding Report”, to be published on 19 July 2018. The Report will be available to subscribers of GCR’s Structured Finance subscription service.
NATIONAL SCALE RATINGS HISTORY
* Indicative ratings accorded on 19 July 2018.
Structured Finance Analyst
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Structured Finance Analyst
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Sector Head: Structured Finance Ratings
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
- Global Master Structured Finance Rating Criteria (Feb’17);
- Global Criteria for Rating Property Funds (Feb’18);
- Global Master Criteria for Rating Corporate Entities (Feb’18);
- Global Structurally Enhanced Corporate Bonds Rating Criteria (Nov’17);
- Accelerate Property Fund Ltd Corporate Rating Report (Aug’17);
- Accelerate Property Fund Ltd Senior Secured Notes New Issuance Report (Sep’14); and
- Subsequent Tap Issuance Reports (Oct’16 and Aug’17).
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS . IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S STRUCTURED FINANCE GLOSSARY
|Agreement||A negotiated and usually legally enforceable understanding between two or more legally competent parties.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|Corporate Credit Rating||A credit rating accorded to a corporate entity.|
|Coupon||Interest payment on a security.|
|Credit||A contractual agreement in which a borrower receives something of value now, and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Debt||An obligation to repay a sum of money.|
|Default||A default occurs when: 1.) The Borrower is unable to repay its debt obligations in full; 2.) A credit-loss event such as charge-off, specific provision or distressed restructuring involving the forgiveness or postponement of obligations; 3.) The borrower is past due more than X days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors.|
|Gross Lettable Area||Used in commercial property to indicate the amount of floor space rented or available for rental.|
|Hedging||A financial risk management process or function to take a market position to protect against an eventuality. Taking an offsetting position in addition to an existing position. The correlation between the existing and offsetting position is negative.|
|Insurance||Provides protection against a possible eventuality.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Lease||Agreement or temporary use and enjoyment of a corporeal thing (movable or immovable property) the whole or part thereof for rent. The essential elements of a contract of lease are: 1.) Undertaking of lessor to give the lessee the use and enjoyment of something; 2.) Agreement between the lessor and lessee that the lessee’s right to use and enjoyment is temporary; and 3.) Lessee’s undertaking to pay a sum or rent.|
|Lender||A credit provider that is owed debt obligations by a debtor.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Loss||A tangible or intangible, financial or non-financial loss of economic value.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Notching||A movement in ratings.|
|Noteholder||Investor of capital market securities.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Proceeds||Funds from issuance of debt securities or sale of assets.|
|Property||Movable or immovable asset.|
|Ranking||A priority applied to obligations in order of seniority.|
|Rating Outlook||A Rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Real Estate||Property that consists of land and / or buildings.|
|Recovery||The action or process of regaining possession or control of something lost. To recoup losses.|
|Refinance||The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.|
|Rent||Payment from a lessee to the lessor for the temporary use of an asset.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Stock Code||A unique code allocated to a publicly listed security.|
|Structured Finance||A method of raising funds in the capital markets. A Structured Finance transaction is established to accomplish certain funding objectives whist reducing risk.|
|Trust||A third party that acts in the best interest of another party, according to the trust deed, usually the investors. Owner of a securitisation vehicle that acts in the best interest of the Noteholders.|
|Ultimate Payment||A measure of the principal debt, interest, fees and expenses being repaid over a period of time determined by recoveries.|
|Valuation||An assessment of the property value, with the value being compared to similar properties in the area.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The Issuer participated in the rating process via face-to-face meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to the Issuer and Arranger, with no contestation of the ratings.
The information received from the Issuer and other reliable third parties to accord the credit ratings included:
- Latest property valuation certificates for the Secured Properties dated 31 March 2018.
- Accelerate’s Audited Financial Statements for the year ended 31 March 2017 and Unaudited Financial Statements for the year ended 31 March 2018.
- Permitted Facilities breakdown at 31 March 2018.
- Secured Properties portfolio breakdown, including annual net income per property at 31 March 2018.
- Vacancy and debtors ageing information on the Secured Properties at 31 March 2018.
- Legal Opinion in respect of the New Notes.
- Signed and executed APF07 APS.
The ratings above were solicited by the Issuer of the transaction; GCR has been compensated for the provision of the ratings.