Johannesburg, 7 September 2018 — Global Credit Ratings (“GCR”) has accorded final, public long-term credit ratings of ‘AA(ZA)’ with a ‘Negative’ Outlook to the following Senior Secured Floating Rate Notes (the “New Notes”) issued by Emira Property Fund Limited (“Emira” or the “Issuer”) on 7 September 2018:
- R130m 3-year Senior Secured Notes, stock code EPF016, due September 2021………………….‘AA(ZA)’; ‘Negative’ Outlook;
- R200m 5-year Senior Secured Notes, stock code EPF017, due September 2023………………….‘AA(ZA)’; ‘Negative’ Outlook.
Concurrently, GCR has affirmed the final, public long-term credit rating and rating outlook of ‘AA(ZA)’ with a ‘Negative’ Outlook accorded to the following Senior Secured Floating Rate Notes (the “Existing Notes”):
- R70m 5-year Senior Secured Notes, stock code EPF007, due 2 September 2020………………….‘AA(ZA)’; ‘Negative’ Outlook.
Collectively, the New Notes and Existing will hereinafter be referred to as the “Senior Notes”. The public ratings accorded to the Senior Notes relate 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. It is important to note that the abovementioned ratings are different from the ‘A(za)’long-term rating of the senior unsecured debt of the Issuer.
SUMMARY RATING RATIONALE
Emira is a mid-sized Real Estate Investment Trust (“REIT”) reporting a property portfolio of R12.5bn at FY18. The REIT has maintained a relatively stable portfolio mix, with marginal expansion in the retail sector and a growing investment in an offshore listed property fund also provides some diversification. The fund disposed of several properties during FY18, including some properties that formed part of the Group 1 Property Portfolio. These disposals are in line with Emira’s strategy to rebalance its portfolio, with further disposals of non-core, underperforming and risky properties expected in FY19.
The open market values (“OMV”) of the Group 1 Property Portfolio declined to R978m as at June 2018 (June 2017: R1.287bn), mostly as a result of the removal of seven properties from the secured portfolio as discussed above. Nonetheless, there was a net increase of R66m in the portfolio fair value (calculated including director’s valuations), whereas the independent property valuations (conducted solely by third parties) increased by R30m for the remaining properties in the secured portfolio. GCR utilised only the independent property valuations in its analysis, in line with its approach in respect of all other secured bonds issued by other property funds.
GCR calculated a Group 1 Notes LTV ratio of 39.4% using director’s valuations. The transaction documentation allows the LTV ratio to be calculated using either external or director valuations. However, in line with GCR’s property backed Secured Bond valuations methodology, GCR calculated a Group 1 Notes Loan to Value (“LTV”) ratio of 40.9% based on external valuations solely (noting that external valuations are done on a 3-year cycle and therefore some external valuations are dated with one property last valued in 2016) for the secured portfolio and the capital structure post the issuance of the New Notes, which is marginally above the 40% covenant level.
The ratings of the Senior Notes are derived by applying a notching approach, starting with the long-term corporate credit rating of the Issuer. Based on GCR’s Global Structurally Enhanced Corporate Bonds Rating Criteria, the calculated overall recovery rate carries the “Excellent Recovery Prospects” qualification. Accordingly, a three notch rating uplift on the national scale is recommended for the Senior Notes. The Negative Outlook mirrors the Issuer’s corporate rating outlook, which reflected the concentration of debt maturities in the short term as at the May 2018 review date. Should the overall estimated recovery rate decline, then the ratings accorded to the Senior Secured Notes may potentially be notched downwards.
For more information on the Transaction and the ratings accorded to the Senior Notes, please refer to the Emira Property Fund Senior Secured Floating Rate Notes – Pre-Funding Report, to be published on 7 September 2018. The Report will be available to subscribers of GCR’s Structured Finance subscription service.
NATIONAL SCALE RATINGS HISTORY
Structured Finance Analyst
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Senior Structured Finance Analyst
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Sector Head: Structured Finance Ratings
+27 11 784 1771
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
- Global Master Structured Finance Rating Criteria (Feb’17);
- Global Master Criteria for Rating Corporate Entities (Feb’18);
- Global Criteria for Rating Property Funds and Commercial Real Estate Companies (Feb’18);
- Global Structurally Enhanced Corporate Bonds Rating Criteria (Nov’17);
- Emira Property Fund Limited Corporate Rating Report (May’18); and
- Emira Property Fund Ltd Senior Secured Notes New Issuance Report (Aug’15).
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.
The information received from the Issuer:
- Updated internal and external property valuations as at June 2018
- 1 Year Trading Forecast for the secured properties;
- Tenancy schedules as at 31 July 2018;
- Property arrears as at 31 July 2018;
- Property vacancies as at 31 July 2018; and
- The Issuer’s Integrated Report for the year ended 30 June 2018.
- A final signed updated legal opinion.
- Final signed APS’s in respect of the EPF016 and EPF017 Notes issuance.
The ratings above were solicited by the Issuer of the transaction; GCR has been compensated for the provision of the ratings.