Johannesburg, 19 August 2016 — Global Credit Ratings (“GCR”) has affirmed the final, public long term credit rating of ‘AA(ZA)’ with a Stable Outlook accorded to the EPF006 and EPF007 Senior Secured Floating Rate Notes (collectively referred to as the Group 1 Notes).
The final, public ratings accorded to the Group 1 Notes relates to the ultimate payment of interest and principal (as opposed to timely, akin to a loss severity rating therefore). The rating excludes an assessment of the ability of the Issuer to pay any (early repayment) penalties.
Emira is a growing mid-sized REIT as evidenced by a 48% increase in value and asset quality of the property portfolio (Group 1 Secured Property Portfolio) in the past three years. This is borne out by Emira’s successful implementation of its strategic measures which include the selective redevelopment of assets, disposal of non-core underperforming properties and reduction of vacancies through active management of lease expiry profiles. Emira’s small investment in an offshore listed property fund has also provided some diversification benefits.
Emira recently released two properties in the secured portfolio (valued at an aggregate R80m at June 2016) and subsequently substituted them with three industrial properties and one retail property, valued at an aggregate R139m at June 2016. Management indicated that this was a strategic move aimed at reducing office exposure in the secured portfolio and the strategic redevelopment of the released properties.
Vacancies in the secured portfolio have slightly decreased from 8.9% as at July ’15 to 8.6% at July ’16 owing to reduction in vacancies in most of the properties and three of the substituted properties being fully tenanted. While the lease expiry profile has generally extended due to improved tenant retention, it is noted that quite a number of leases will be expiring in the short term, albeit management has indicated that some of the properties are expected to renew the leases while some have renewed. The arrears for the Group 1 Secured Property Portfolio have increased to 6.8% at July ’16 from 2.9% at July ’15. Given the progress in terms of letting activity, the lease expiry profile for the portfolio is evenly spread out over the long term.
The most recent open market valuations and substitution of assets have resulted in the secured portfolio’s value slightly decreasing and subsequently pushing up the LTV to just shy of the 40% covenant level, from 38.2% as at 30 June ’15 to 39.3% as at 30 June ’16.
The ratings of the Group 1 Notes are derived by applying a notching approach, starting from the Long Term senior unsecured credit rating of Emira. In determining the appropriate number of rating notches to be applied, GCR compares the estimated overall recovery rate after a potential default of the Group 1 Notes with an assumed average corporate senior unsecured debt obligation recovery rate. If overall estimated recoveries are higher than the assumed average recovery rate, a notching uplift may be applicable.
Based on GCR’s Global Structurally Enhanced Corporate Bonds Rating Criteria, the calculated overall recovery rate of 94.5% carries the qualification “Excellent Recovery Prospects”. A three notch rating uplift on the national scale is deemed to be appropriate for the Transaction. Accordingly, GCR has affirmed the final, public ‘AA(ZA)’ rating with a Stable Outlook to the Group 1 Notes.
Structured Finance Analyst
Sector Head: Structured Finance Ratings
+27 11 784 1771
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Structurally Enhanced Corporate Bonds Rating Criteria – Oct ’15;
Global Master Criteria for Rating Corporate Entities – Feb ’16;
Global Summary Criteria for Rating Property Funds – May ’16;
RATING LIMITATIONS AND DISCLAIMERS
|Agent||An agreement where one party (agent) concludes a juristic act on behalf of the other (principal). The agent undertakes to perform a task or mandate on behalf of the principal.|
|Arranger||Usually an Investment bank that advises and constructs a transaction and acts as a conduit between the transaction parties: Client, Issuer, Credit Rating Agency, Investors, Legal Counsel and Servicers.|
|Arrears||General term for non-performing obligations, i.e. obligations that are overdue.|
|Asset||An item with economic value that an entity owns or controls.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|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 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.|
|Credit Risk||The probability or likelihood that a borrower or issuer will not meet its debt obligations. Credit Risk can further be separated between current credit risk (immediate) and potential credit risk (deferred).|
|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.|
|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.|
|Forecast||A calculation or estimate of future financial events.|
|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.|
|Junior||A security that has a lower repayment priority than senior securities.|
|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.|
|Liability||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|Liquidity||The ability to repay short-term obligations or short-term availability of liquid assets to a market or entity.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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.|
|Obligation||The title given to the legal relationship that exists between parties to an agreement when they acquire personal rights against each other for entitlement to perform.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Property||Movable or immovable asset.|
|Provision||An amount set aside for expected losses to be incurred by a creditor.|
|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).|
|Recovery||The action or process of regaining possession or control of something lost. To recoup losses.|
|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.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
|Senior||A security that has a higher repayment priority than junior securities.|
|Senior Unsecured Debt||Securities that have priority ahead of all other unsecured or subordinated debt for the payment in the event 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.|
|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.|
|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 rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating 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 rating/s above were solicited by the Issuer of the Transaction; GCR has been compensated for the provision of the ratings.
The credit rating/s has 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 July 2016;
- Updated Property Valuations as at June 2016;
- Property Vacancies and Arrears as at July 2016; and
- Letters of Asset Substitution.