Announcements

GCR affirms Hospitality Property Fund Limited’s rating of BBB(ZA); Outlook Stable.

Johannesburg, 26 Oct 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Hospitality Property Fund Limited of BBB(ZA) and A3(ZA) in the long term and short term respectively; with the outlook accorded as stable.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Hospitality Property Fund Limited (“HPF”) based on the following key criteria:

HPF is South Africa’s largest multi-brand hotel group. Amidst the volatile hospitality industry, HPF has been successful in shifting its portfolio towards higher value marque assets targeting the comparatively stable upper end of the travel sector, whilst disposing of those that are highly reliant on one source of income. However, this has resulted in high portfolio concentration, with the largest hotel (Westin) accounting for 28% of portfolio value and the top five and ten properties for 64% and 86% of value respectively (FYE14: 62%; 83%). Concentration is partly a factor of the superior occupancy levels and room rates achieved at these hotels, which has seen their valuations increase while those of the general portfolio have decreased.

Rental income increased by 2% to R433m in F15, but fell 6% below budget. With administrative costs in line with budget, this had a knock-on effect to operating income, which rose by a lesser 3% to R393m, 7.2% short of budget. The lower income relative to budget was attributed to the underperformance of several hotels that are more dependent on conferencing revenue, as well as the impact of weaker than expected tourist arrivals and curbs on government spend. With these factors still impacting the sector, relatively low growth is projected for F16.

Gross debt rose by R85m to R1.86bn at FYE15, but the appreciation in the property portfolio value resulted in a slight decline in the gross LTV to 36.2% (FYE14: 36.7%), whilst the high cash holdings saw the net LTV reduce to 32.2% (FYE14: 32.8%). Weaker earnings, however, resulted in a slight rise in gross debt to EBITDA to 473% (FYE14: 463%), and net interest cover decreased to 2.4x (F14: 2.6x), albeit remaining in line with the metrics reported since FYE12 and with those reported by similarly rated REITs. HPF met its debt covenant limits at FYE15, which require the portfolio LTV ratio to remain below 40% and net interest cover to be above 2x.

HPF’s short term liquidity is underpinned by the high cash balance and expected inflows from disposals, which will enable it to settle or refinance its short term obligation. However, the more significant refinancing risk will arise in F17, when R600m in secured DMTN notes mature. Thus, it is critical that refinancing arrangements are made well in advance of maturity and that there is no over reliance on a single source of funding.

GCR considers the potential transaction with Tsogo Sun Holdings Limited (“Tsogo”) to be ratings positive for HPF, given the scale and expertise that Tsogo would bring. Nevertheless, as there are currently scant details regarding the size or terms and conditions of the transaction, as well as the potential regulatory hurdles or objections the deal may encounter, no ratings uplift can be given until the transaction is finalised.

The successful conclusion of the Tsogo deal could substantially improve HPF’s corporate profile, giving it greater scale and financial support. In the absence of the Tsogo deal, the ratings are unlikely to improve until there is an improvement in the current environment and meaningful growth in rental income and operating profit. Conversely, a deterioration of market conditions that negatively impacts hotel revenue and thus rental income could result in negative ratings action. Failure to adequately and timeously refinance maturing facilities on favourable terms would also be ratings negative.

NATIONAL SCALE RATINGS HISTORY  
   
Initial rating (November 2012)  
Long term: BBB-(ZA); Short term: A3(ZA)  
Outlook: Stable  
   
Last rating (November 2014)  
Long term: BBB(ZA); Short term: A3(ZA)  
Outlook: Stable  
   

ANALYTICAL CONTACTS

Primary Analyst  
Eyal Shevel  
Sector Head: Corporate & Public Sector Debt Ratings  
(011) 784-1771  
Shevel@globalratings.net  
   
Committee Chairperson  
Patricia Zvarayi  
Senior Analyst  
(011) 784-1771  
patricia@globalratings.net  

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2015

Criteria for Rating Property Funds, updated April 2015

Hospitality Property Fund Limited rating reports (2012-2014)

Senior Secured Bond Issuance reports, May 2013, April 2014, and February 2015

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

bond A long term debt instrument issued by either a company, institution or the government to raise funds.
Budget Financial plan that serves as an estimate of future cost, revenues or both.
Corporate Governance Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.
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 Rating Agency An entity that provides credit rating services.
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.
Default Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.
EBITDA EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.
Interest Cover Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.
Interest Rate The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.
LC An LC is a guarantee by a bank on behalf of a corporate customer that payment will be made if that entity cannot to meet its obligations.
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.
LTV Principal balance of a loan divided by the value of the property that it funds. LTVs can be computed as the loan balance to most recent property market value, or relative to the original property market value.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable.
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.
Operating Profit Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
Refinancing 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.
REIT A REIT is a company that owns or finances income-producing real estate. REITs are subject to special tax considerations and generally pay out all of their taxable income as distributions to shareholders.

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. 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.

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.

Hospitality Property Fund Limited 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/s has been disclosed to Hospitality Property Fund Limited with no contestation of the rating.

The information received from Hospitality Property Fund Limited and other reliable third parties to accord the credit rating(s) included;

  • Audited financial results of Company per 30 June 2015
  • Four years comparative audited financial statements
  • Full details of the property portfolio
  • Full details of funding facilities
  • Corporate governance and enterprise risk framework
  • Industry comparative data

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.

image_pdf

Leave a Reply



ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2021 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.