Announcements Corporate Rating Alerts

GCR affirms National Scale Issuer Rating on PDM Holdings Limited at A-(KE) on a strong financial profile; Outlook Stable.

Rating Action

Johannesburg, 10 October 2019 – GCR Ratings (“GCR”) has affirmed the national scale Issuer ratings accorded to PDM Holdings Limited (“PDM”) of A-(KE) and A2(KE) for long term and short term respectively, with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
PDM Holdings Limited Issuer Long Term National A-(KE) Stable Outlook
Issuer Short Term National A2(KE)

On May 22, 2019 GCR announced that it had released a new rating framework and sectoral criteria. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the PDM Holdings Limited rating review under the new Criteria for Rating Real Estate Investment Trusts and Other Commercial Property Companies. As a result, the ratings have been removed from ‘Under Criteria Observation’ and the rating reviewed in line with the new methodology.

Rating Rationale

The ratings reflect PDM’s continued sound performance and very low gearing, which serves to offset concerns regarding the portfolio’s somewhat limited scale and diversification.

PDM’s ratings remain constrained by its small portfolio size, exposure to key tenants and the very high concentration to discrete assets, with just nine income-generating properties. Nevertheless, the portfolio has demonstrated sustained sound performance, underpinned by a high quality tenant base and a long, smoothed-out lease expiry profile which provides a level of predictability of revenue over the medium term. The sound performance has also been reflected in the low vacancy rates and above-inflation escalations on the base portfolio, which is supportive of organic rental income growth. Despite the industry-wide pressure on rental rates, GCR expects PDM’s operating margin to improve to between 56-60% over the rating horizon as occupancies increase at the marquee asset Vienna Court.

The ratings are supported by the conservative funding profile, with the LTV being managed below the 15% mark over the five-year review period. Interest coverage and debt to operating income continue to gradually improve on the back of organic earnings growth, registering at 7.2x and 1.8x respectively at FY18. Development risk will be conservatively managed, with any significant capital expenditure or acquisitions to be funded by proceeds from current for-sale development pipeline. Thus, GCR expects gearing metrics to strong over the rating horizon. The long, well-laddered debt maturity profile is positively considered in support of the ratings, although the concentration of funding counterparties is somewhat of a constraint.

PDM’s liquidity profile is considered to be sound, as suggested by the 3x liquidity sources coverage of obligations. The strong liquidity position is underpinned by c.KSh1bn in committed unutilised facilities and a stable base of recurring cash flows, which is expected to be sufficient to meet the limited capex requirements and debt maturities. The liquidity assessment is further supported by the low asset encumbrances, which suggest a high level of financial flexibility.

Outlook Statement

The Stable Outlook reflects GCR’s expectation that earnings will continue to evidence gradual growth over the rating horizon on the back of sound performance from the underlying portfolio, while credit protection metrics will remain within the current range.

Rating Triggers

Positive rating action could arise from a significant increase in portfolio scale resulting in sustained rental and cash flow growth, while maintaining conservative credit protection metrics and enhanced liquidity. Conversely, a downgrade could arise from material earnings underperformance or higher leverage due to aggressive funding for growth. Failure to sustain a smoothed-out, medium term debt expiry profile would be viewed negatively.

Analytical Contacts

Primary analyst Tavonga Muchemedzi Analyst: Corporate Ratings
Johannesburg, ZA TavongaM@GCRratings.com +27 11 784 1771
Committee chair Eyal Shevel Sector Head: Corporate Ratings
Johannesburg, ZA Shevel@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Real Investment Trusts and Other Commercial Property Companies, May 2019
GCR’s Country Risk Score report, published June 2019
GCR’s Kenya Corporate Sector Risk Score report, published September 2019
PDM Holdings Limited previous rating reports, 2011-18

Ratings history

PDM Holdings Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Issuer Long term Initial National A-(KE) Stable Outlook April 2011
Issuer Short Term Initial National A2(KE)
Issuer Long term Last National A-(KE) Stable Outlook July 2018
Issuer Short Term Last National A2(KE)

Risk Score Summary

Risk score 9.25
Operating environment 8.25
Country risk score 4.25
Sector risk score 4.00
Business profile -2.00
Portfolio quality -2.00
Management and governance 0.00
Financial profile 3.00
Leverage and Capital Structure 2.00
Liquidity 1.00
Comparative profile 0.00
Group Support 0.00
Peer analysis 0.00

Glossary

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.

Country Risk The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.
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.
DCM Debt Capital Market(s).
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.
Debt Service Ratio A measure of a company’s ability to service its interest and principal redemption costs, expressed as the ratio of earnings or cash flows

over a period to the sum of interest and principal payments over the same timeframe.

Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Downgrade The rating has been lowered on its specific scale.
Facility The grant of availability of money at some future date in return for a fee.
Gearing 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, EBITDA or operating income.
Hedge A form of risk management aimed at mitigating financial loss or other adverse circumstances. May include taking an offsetting position in addition to an existing position. The correlation between the existing and offsetting position is negative.
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 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.
Issuer Ratings See GCR Rating Scales, Symbols and Definitions.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
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.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Market Risk Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.
Market value An assessment of the property value, with the value being compared to similar properties in the area.
Policy The legal document issued by the company to the policyholder, which outlines the conditions and terms of the insurance.
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.
Rating Horizon The rating outlook period.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
REIT Real Estate Investment Trust. A company that owns, operates or finances income-producing real estate.
Rent Payment from a lessee to the lessor for the temporary use of an asset.
Retention The net amount of risk the ceding company keeps for its own account.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
Short Term Current; ordinarily less than one year.
Upgrade The rating has been raised on its specific scale.
Yield Percentage return on an investment or security, usually calculated at an annual rate.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings 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; 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 credit ratings have been disclosed to PDM Holdings Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

PDM Holdings 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 information received from PDM Holdings Limited and other reliable third parties to accord the credit ratings included:

  • the 2018 audited annual financial statements (plus four years of audited comparative numbers);
  • management accounts for 1Q FY19
  • a breakdown of debt facilities available and related counterparties at 30 April 2019 (including related debt covenants)
  • a breakdown of the property portfolio at 31 December 2018


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