Johannesburg, 19 September 2017 — Global Credit Ratings (“GCR”) has affirmed the final, public long-term credit rating of ‘AA(ZA)’ and revised the Outlook from Stable to Negative for the following Senior Secured Floating Rate Notes (the “Senior Notes”):
• R430m Senior Secured Notes, stock code EPF006, due 19 August 2018; and
• R70m Senior Secured Notes, stock code EPF007, due 2 September 2020.
The Senior Notes were issued on 19 August 2015 (the “Transaction”).
The final, public rating accorded to the Senior Notes relates to the ultimate payment of interest and principal (as opposed to timely, akin to a loss severity rating thereof). The rating excludes an assessment of the ability of the Issuer to pay any (early repayment) penalties.
Emira Property Fund (“Emira”) is a mid-sized REIT reporting a R13.3bn property portfolio at 1H 2017 with, c.57% comprising of ‘A’ grade tenants. GCR noted an upward trend in the average value of properties in the Office, Retail and Industrial sectors. Emira’s small investment in an offshore listed property fund has also provided some diversification benefits.
The most recent property values (a combination of internal, director’s valuations and independent, open market valuations) have resulted in the secured portfolio’s value marginally increasing to R1.287bn at 30 June 2017 (30 June 2016:R1.273bn). Nonetheless, GCR only relied on independent property valuations in its analysis (a third of the portfolio is externally valued once every three years), which reflected a portfolio value of R1.287bn.
GCR calculated an LTV ratio of 38.8% at 30 June 2017 which was marginally below the 40% covenant level, albeit a slight improvement from the LTV ratio of 39.3% reported at 30 June 2016, however, it remains in line with the ratio of 38.2% reported at 30 June 2015.
Vacancies of the secured property portfolio were reported at 3.6% at June 2017 and 8.6% at July 2016. GCR noticed high vacancies at Highway Business Park/HBP Industrial Units at 19.7%, The Tramshed at 15.3% and The Pinnacle at 11.3%, albeit below the stressed vacancy assumptions.
Given the progress in terms of active letting activity, the lease expiry profile for the portfolio is evenly spread out over the long term. The lease expiry profile at July 2017 was reported as 16.4% for 2018 FY, 33.9% for 2019 FY, 22.1% for 2020 FY and 23.1% from 2021 onwards. The remainder of the leases has either matured, reported as 0.9% or are vacant which was reported as 3.6%. Management is in process of negotiating the leases scheduled to expire during the 2018 FY.
The property portfolio is mostly aligned as an industrial counter – the 13 properties make up 106,582 of GLA and market value of R476m. The retail portfolio has four properties with 39,331 GLA and market value of R458m with 69% national tenants. Fortunately, the office exposure has decreased to four properties measuring 27,937 of GLA at a market value of R349m.
Property values were modelled as a function of rental income. Potential recoveries from the sale of property have slightly improved owing to the gross rental income from the properties in the secured portfolio.
The rating of the Senior Notes is derived by applying a notching approach, starting with the long-term corporate credit rating of the Issuer. Based on the fundamentals and prospects of Emira, GCR accorded a long-term ‘A(ZA)’ national scale corporate credit rating to the Issuer, which was affirmed in April 2017 with a Negative Outlook. Based on GCR’s Global Structurally Enhanced Corporate Bonds Rating Criteria, the calculated overall recovery rate of 99.0% that carries the qualification “Excellent Recovery Prospects”. A three notch rating uplift on the national scale is recommended for the Transaction, therefore affirming the rating and revising the Outlook to Negative for the Senior Notes due to the Outlook of the Issuer being revised to Negative which may impact the rating of the Senior Notes, should the Issuer’s long-term corporate credit rating change.
|Stock code||Last Rating|
Senior Structured Finance Analyst
Structured Finance Analyst
Sector Head: Structured Finance Ratings
+27 11 784 1771
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Structurally Enhanced Corporate Bonds Rating Criteria – Sep ’16;
Global Master Criteria for Rating Corporate Entities – Feb ’17;
Global Summary Criteria for Rating Property Funds – Feb ’17;
Emira Property Fund Limited Corporate Analysis Report – Apr ’17 and
Emira Property Fund Limited New Group 1 Notes New Issuance Report – Aug ’15.
RATING LIMITATIONS AND DISCLAIMERS
|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.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|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.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|Floating Rate Notes||Debt securities that have a periodic interest rate reset in relation to the reference rate, i.e. JIBAR.|
|Income||Money received, especially on a regular basis, for work or through investments.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|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.|
|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.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Notching||A movement in ratings.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Property||Movable or immovable asset.|
|Recovery||The action or process of regaining possession or control of something lost. To recoup losses.|
|Rent||Payment from a lessee to the lessor for the temporary use of an asset.|
|Repayment||Payment made to honour obligations in regards to a credit agreement in the following credited order: 3.) Satisfy the due or unpaid interest charges; 4.) Satisfy the due or unpaid fees or charges; and 5.) To reduce the amount of the principal debt.|
|Senior||A security that has a higher repayment priority than junior securities.|
|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.|
|Spread||The interest rate that is paid in addition to the reference rate for debt securities.|
|Stock Code||A unique code allocated to a publicly listed security.|
|Transaction||A transaction that enables an Issuer to issue debt securities in the capital markets. A debt issuance programme that allows an Issuer the continued and flexible issuance of several types of securities in accordance with the programme terms and conditions.|
|Ultimate Payment||A measure of the principal debt, interest, fees and expenses being repaid over a period of time determined by recoveries.|
|Vacancy||In commercial property, usually expressed as a percentage of unoccupied floor space in relation to the GLA.|
|Valuation||An assessment of the property value, with the value being compared to similar properties in the area.|
For a detailed glossary of terms utilised in this announcement please click here
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings were 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 and the Arranger participated in the rating process via face-to-face meetings, teleconferences and other written correspondence. Furthermore, the quality of info received was considered adequate and has been independently verified where possible.
The ratings above were solicited by the Issuer of the Transaction; GCR has been compensated for the provision of the ratings.
The credit ratings have been disclosed to the Issuer and the Arranger with no contestation of the rating.
The information received from the Issuer:
1 Year Trading Forecast;
Tenancy Schedules as at June 2017;
Updated Property Valuations as at June and July 2017; and
Property Vacancies and Arrears as at June 2017.