Johannesburg, 26 September 2017 — Global Credit Ratings has accorded Cytonn Investments Management Plc national scale Issuer ratings of BB(KE) and B(KE) in the long and short term respectively; with the outlook accorded as Stable. Concurrently, Global Credit Ratings has also accorded Cytonn Investments Management Plc a Commercial Paper rating of B(KE). The ratings are valid until 30 September 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Cytonn Investments Management Plc (“Cytonn” or “the group”) based on the following key criteria:
Founded in 2014, Cytonn is a Kenyan investment manager that offers a range of alternative products to retail and institutional investors, supported by an extensive distribution model and over 300 skilled professionals. Although it has a comprehensive strategy outlining the rapid growth of assets under management, its main exposure is to the development and sale of residential and mixed-use properties, with plans to increase the project pipeline from KES82.7bn at 1H FY17 (FY16: KES46.7bn) to c.KES112.2bn by 3Q FY18. Accordingly, the ratings take account of the risks of identifying, funding and executing such developments, and Cytonn’s ability to effectively recycle capital while consistently generating targeted returns for investors.
The ratings are currently constrained by the short track record, albeit GCR notes the rigour of the governance structures, comprehensive risk protocols and the quality of management. While Cytonn’s research, support structures and client profile are deemed sound, its broader investment philosophy and strategic execution remain unproven, as its offerings are still at nascent stages and none of the developments have been completed. Cognisance is also taken of the partnership with global private equity firm Taaleri Plc on the first two developments, as well as relationships being developed with strong financial institutions. While the associated funding is moderate given the aggressive growth forecasts, this is indicative of Cytonn’s ability to secure support from major institutional investors/funders.
The real estate model is built on extensive due diligence, research and market knowledge, which allows management to unlock value from partnerships with landowners. Leveraging its agency force, Cytonn plans to pre-sell 10-15% of a project off-plan and a large proportion of the remainder during construction to mitigate capital risk. Each project is housed in a separate special purpose vehicle (“SPV”), which is set up as a limited liability partnership and funded using equity, mezzanine finance and bank debt at 20:20:60 split. Cash Management Solutions (“CMS”), the group’s funding vehicle, invests in the developments via one-year rolling investments (that have historically yielded a return of 21% p.a.). Revenues mostly result from sales and management fees, and as such, growth is contingent on timely and successful project execution (which could be curtailed by regulatory, construction and socio-political factors) as well as strong project uptake, while margin and free cash flow variability could be exacerbated by market volatility. This could restrict planned project returns, which range from 20-30%.
Cytonn reports conservative LTVs and earnings based gearing at company level, but the developments significantly elevate group LTV metrics, while driving a weak/volatile debt service and earnings based gearing trajectory, which is only likely to stabilise with the medium-term diversification of the asset profile. As such, guaranteeing debt related to its developments effectively negates the ring-fencing of the SPVs, compromising the company’s credit protection metrics.
Plans to issue three-year project notes backed by cash flows from four developments will add funding flexibility, in view of the rapid deal pipeline traction projected. The mezzanine and external debt ratios per project align with most developers, but a strong Issuer rating depends on (amongst other factors) there being ample unencumbered assets/investments that can be readily sold at prices close to net book/open market value. Liquidity is also function of the ability to sustain strong pre-sales and capital inflows from Cytonn’s portfolio of investment products, given the high implied capital charge of using bank overdraft facilities to bridge funding gaps.
Upward rating pressure could arise from timely completion of large developments, while maintaining credit risk metrics within guidance, demonstrating the ability to manage a rapidly expanding project pipeline without curtailing free cash flows. Conversely, delays in the execution of key projects and/or the manifestation of unmitigated regulatory, construction or market risks. An overly aggressive project rollout could also curtail liquidity and ultimate debt service, placing downward pressure on the ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (September 2017)|
|Long term: BB(KE); Short term: B(KE); Commercial paper: B(KE)|
|Primary Analyst||Committee Chairperson|
|Patricia Zvarayi||Eyal Shevel|
|Senior Analyst||Sector Head: Corporate Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2017
Global Criteria for Rating Property Funds, updated February 2017
Global Master Criteria for Rating Funds and Asset Managers, updated March 2017
RATING LIMITATIONS AND DISCLAIMERS
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|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|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.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|Institutional Investors||Financial institutions such as pension funds, asset managers and insurance companies, which invest large amounts in financial markets on behalf of their clients.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|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.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|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.|
|Special Purpose Vehicle||An entity that is created to fulfil specific objectives. An SPV is normally bankruptcy/insolvency remote and created to isolate financial risk.|
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 ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Cytonn Investments Management Plc 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 ratings have been disclosed to Cytonn Investments Management Plc with no contestation of the ratings.
The information received from Cytonn Investments Management Plc and other reliable third parties to accord the credit rating(s) included:
- the 2016 audited annual financial statements and audited financial statements for the 15 months to 31 December 2015;
- summary of the June 2017 management accounts;
- internal and/or external management reports;
- Cytonn Project Notes LLP SPV cash flow models;
- full year company and consolidated budgets spanning 2017-19;
- property portfolio and project pipeline data;
- term sheets in respect of specific facilities;
- corporate governance and enterprise risk framework; and
- debt facilities as at 30 June 2017.
The ratings above were solicited by, or on behalf of, Cytonn Investments Management Plc, and therefore, GCR has been compensated for the provision of the ratings.
GCR accords Cytonn Investments Management Plc an initial rating of BB(KE); Outlook Stable.