Lagos Nigeria, 29 January 2019 — Global Credit Ratings (“GCR”) has assigned an indicative public long-term credit rating of ‘BBB+(NG)’ to Axxela Funding 1 Plc’s proposed N15.5bn Series 1 Senior Secured Fixed Rate Bonds, with the Outlook accorded as Stable. The indicative bond rating expires in June 2019.
GCR has accorded the above credit rating to Axxela Funding 1 Plc’s (“the Issuer”) proposed Series 1 Bonds based on the following key criteria:
The Issuer is a special purpose vehicle incorporated primarily to operate as a business development company and raise finances for the business of the Sponsor and its subsidiaries. The Sponsor is a leading private gas distribution group in Nigeria. Its core business is the development of gas and power infrastructure, and distribution of natural gas for power generation to industrial and commercial customers. GCR accorded the Sponsor a national scale long-term Issuer rating of ‘BBB+(NG)’ in September 2018, with a Stable outlook. The Bond rating is intrinsically linked to the financial performance of the Sponsor, and any change in the Sponsor rating will impact the Bond rating.
The Issuer has filed an application with Securities and Exchange Commission to issue bonds in the Nigerian capital market, under a N50bn Bond Issuance Programme (“BIP”). Under the BIP, bonds shall be issued in Series or Tranches from time to time, with varying maturities, terms and conditions, and rates of interests. The Issuer is undertaking an initial N15.5bn in Series 1 Issue under the BIP. The Series 1 Bonds shall be senior secured bonds, to be issued by way of a book build. The Bonds shall have a tenor of seven (7) years, with two (2) years moratorium on principal repayment, while interest shall be paid semi-annually in arrears. The Series 1 Bonds shall constitute direct, irrevocable and senior secured obligations of the Issuer, and shall at all times rank pari passu and without any preference among themselves.
The transaction mechanics entail the use of the proceeds of the Bonds issued by the Issuer to purchase bonds issued by the Co-Obligors on similar terms through a private placement programme constituted by the Master Notes Subscription Agreement.
Pursuant to the draft Series 1 Trust Deed, security is primarily created over trade receivables due from take or pay contracts, held in trust under an existing Security Deed, in addition to the assets to be pledged by the Sponsor. The existing security package is currently pledged to secure indebtedness to an existing lender, which has indicated willingness to admit the bondholders as beneficiaries to the security package. However, a written consent letter from the existing lender is yet to be provided.
The transaction arranger and the Sponsor have indicated that existing receivables will not be sold off to any entity, neither will the receipts on future receivables be ring-fenced for the payment of the bond obligations. Based on the foregoing, GCR considers the security structure contrary to trade receivable securitisation, and does not consider future trade receivables as a credit enhancement as recovery is assumed to be zero in a default scenario. Also, GCR considers trade receivables as part of the working capital available for day to day operations of the Co-Obligors, which have been factored into the Issuer ratings accorded to the Sponsor. Accordingly, an indicative rating of BBB+(NG) has been accorded in line with the long term unsecured corporate rating of the Sponsor.
The indicative rating accorded to the Series 1 Bonds relates to ultimate payment of principal and interest (as opposed to timely, akin to an expected loss rating, which is a function of probability of default and loss severity). The final rating is contingent on the proper execution of the security documents in favour of the Bondholders, which include a Deed of Accession. A downgrade in the rating of the Sponsor could impact the final rating to be accorded.
NATIONAL SCALE RATINGS HISTORY
Initial/last rating (December 2018)
Series 1 Senior Secured Bonds: BBB+(NG)
Rating outlook: Stable
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Global Master Structured Finance Rating Criteria (September 2018)
Global Structurally Enhanced Corporate Bonds Rating Criteria (November 2018)
Axxela Issuer rating report, 2018
Glossary of terms/ratios, February 2018.
RATING LIMITATIONS AND DISCLAIMERS
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process 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 Bond indicative rating expires in June 2019.
The Issuer and the Lead Issuing House participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit rating has been disclosed to the Issuer.
The information received from the Issuer, the lead Issuing House and other reliable third parties to accord the Bond rating included:
Draft Shelf Prospectus
Draft Programme Trust Deed
Draft Series 1 Pricing Supplement
Draft Series 1 Trust Deed
Draft Legal Opinion from Olaniwun Ajayi LP
Draft Master Notes Subscription Agreement
Gaslink Security Deed
Draft Axxela All Assets Debenture
The rating above was solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the rating.