Lagos Nigeria, 23 October 2018 — Global Credit Ratings (“GCR”) has assigned indicative public long-term credit ratings of ‘BBB+(NG)’ to both Alpha Mead Funding Company Plc’s proposed N2.0bn Series 1 Tranche A Zero Coupon Bonds and N1.1bn Series 1 Tranche B Fixed Rate Bonds, with the Outlook accorded as Stable. The indicative bond ratings expire in February 2019.
GCR has accorded the above credit ratings to Alpha Mead Funding Company Plc’s (“the Issuer” or “AM-Funding”) proposed Series 1 Tranche A and Tranche B Bonds based on the following key criteria:
The Issuer is a special purpose vehicle incorporated to raise funds from the debt capital market for its owners. The two companies that comprise AM-Funding are operationally integrated (albeit not a legal consolidated unit), with common shareholders. GCR accorded the Issuer a national scale long term Issuer rating of ‘BBB(NG)’ in November 2017.
AM-Funding has filed an application with Securities and Exchange Commission to issue short-term bonds to the Nigerian capital market, under a N10bn Short Term Bond Programme (“STBP”). The STBP will be issued in Series, with Series 1 Bonds (“the Bonds”) being a senior secured N3.1bn Issue, to be split into two tranches (Tranche A – N2.0bn, Tranche B – N1.1bn). The Tranche A Bonds will be redeemed at Par on the maturity date, while Tranche B Bonds will be redeemed in 6 equal instalments, with interest and principal payable semi-annually in arrears. The transaction mechanics entail the use of the proceeds of AM-Funding bond Issuance, which constitute senior obligations of the Issuer, to purchase the Intercompany Bonds to be issued by the Underlying Companies under the Intercompany Bond Issuance Agreement. As the Bonds are issued directly by AM-Funding, the Bond ratings are intrinsically linked to the financial performance of the Issuer, and any change in the Issuer rating may have an impact on the Bond ratings.
Pursuant to the terms of the draft Series 1 Tranche A Trust Deed, the Issuer shall create a security interest in the Payment Account and the Performance Bond and any other Transaction Account opened by the Issuer, in favour of the Trustees, in addition to the security granted in the All Assets Debenture. GCR notes from the draft Performance Bond that the insurance cover pertains solely to project completion risks, and will only crystallise if the construction of the underlying properties is not completed by the agreed delivery date. As such, GCR accords more weighting to the security granted in the All Assets Debenture.
According to the draft Series 1 Tranche B Trust Deed, the bonds shall have the benefit of the security granted in the draft All Assets Debenture as well as security interest in the Transaction Accounts. Management has indicated that there is no encumbrance on the security package for the Bonds. The Series 1 Tranche B Bond incorporates a Reserve Account which shall be funded out of the net Issue proceeds up to a balance of the semi-annual payment obligation of the Issuer under the Tranche B Bonds.
The indicative ratings of the Series 1 Tranche A and Tranche B Bonds are derived by applying a notching up approach, starting from the long-term unsecured corporate rating of the Issuer. Although GCR’s estimated recovery calculations suggest “Superior” recovery prospects, the amount that will be realised on the security package depends on the value stamped and registered with the government authorities. The Issuing House indicated that the value to be initially stamped will be determined post book-building, while the funds that will enable full perfection to the full value of the exposure will be warehoused in the Reserve Account, under the control of the Trustees. Based on these considerations and the prolonged security perfection process in Nigeria, a one-notch uplift is considered appropriate for the Series 1 Tranche A and Tranche B Bonds respectively. Accordingly, an indicative rating of ‘BBB+(NG)’ has been assigned to both the Tranche A and Tranche B Bonds.
The indicative rating accorded to each Tranche, and not the entire STBP, relates to ultimate payment of interest and principal (as opposed to timely, akin to an expected loss rating, which is a function of probability of default and loss severity). The final ratings are contingent on the proper execution and perfection of the security documents in favour of the Bondholders. Should the final security package and recovery prospects differ, this could have an impact on the final ratings to be accorded.
NATIONAL SCALE RATINGS HISTORY
Initial/new rating (October 2018)
Series 1 Tranche A: BBB+(NG)
Series 1 Tranche B: BBB+(NG)
Rating outlook: Stable
Last rating: n/a
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018,
Global Summary Structurally Enhanced Corporate Bonds Rating Criteria (November 2017),
Alpha Mead Funding Company Plc Issuer rating reports, 2017
Glossary of terms/ratios, February 2018.
RATING LIMITATIONS AND DISCLAIMERS
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 Bond indicative ratings expire in February 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 ratings have been disclosed to the Issuer.
The information received from Alpha Mead Funding Company Plc to accord the credit ratings included:
2017 full-year management accounts (plus five years of comparative numbers),
Information specific to the rated entity and/or industry was also received,
information relating to the proposed Bond Issue;
Draft Series 1 Tranche A Trust Deed;
Draft Series 1 Tranche B Trust Deed
Draft Series 1 Tranche A Account Bank Agreement;
Draft Series 1 Tranche B Account Bank Agreement;
Draft Series 1 Tranche A Inter-Company Bond Issuance Agreement;
Draft Series 1 Tranche B Inter-Company Bond Issuance Agreement;
Draft All Assets Debenture;
Draft Deed of Charge of Shares;
Legal Opinion on Series 1 Bonds
Base Shelf Prospectus;
Series 1 Tranche A Pricing Supplement;
Series 1 Tranche B Pricing Supplement;
Draft Performance Bond – Lekki Pearl Construction I and II; and
Draft Performance Bond – Green Park Infrastructure.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.