Johannesburg, 18 July 2018—Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to PDM Holdings Limited of A-(KE) and A2(KE) in the long term and short term respectively; with the outlook accorded as Stable. The ratings are valid until 30 June 2019.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to PDM Holdings Limited (“PDM”) based on the following key criteria:
PDM is an affiliate of the Aga Khan Development Network (“AKDN”), which provides a captive tenant base for some of its own properties and a portfolio of properties to manage. In recent years the group has repositioned its business strategy, moving away from developments for rentals and leaning more towards developments for sale. Further, PDM is pursuing private sector development opportunities by positioning itself as preferred partner for property developers in Kenya.
The property portfolio’s solid performance is evidenced by low vacancy levels over the rating horizon and positive rental escalations across all properties, despite an economic slowdown. Notwithstanding the completion of Vienna Court, the portfolio remains concentrated, with a limited number of properties and exposure to key tenants. That said, risk is mitigated by the high number of related party tenants, and the long lease maturity profile PDM has achieved.
Although revenue growth has been moderate, income is expected to grow substantially in FY18 and FY19, as the sales projects come to fruition. Income will also be bolstered by the full year contribution from Vienna Court, and the improved occupancy levels. Key to ratings progression is the ability to maintain a firm development pipeline, to ensure a steady supply of new properties for sale and letting.
Rising expenses are a concern, as inflationary pressures are likely to persist, although note is taken that some of these related to the completion of Vienna Court. Although this will be partly addressed by higher rental income and initial sales, intensive marketing efforts need to be maintained to attain the group’s targets amidst the oversupplied and highly competitive operating environment.
While debt increased marginally to KES1.2bn at FY17 (FY16: KES1.1bn), gearing metrics remained conservative, with a gross LTV of just 17% (FY16: 16%). On the back of the higher earnings, net debt to EBITDA declined from 249% to 209% at FY17. Going forward, gross debt is projected to increase to over KES2.5bn by FY19 to fund the c.KES807m in capital commitments. However, gearing metrics are expected to remain at conservative levels, in line with AKDN funding guidelines. PDM’s access to funding, underpinned by a strong shareholder base and longstanding relationships with banks and other funders. More recently, liquidity is also supported by undrawn overdraft facilities of USD2.5m and KES100m at FY17.
Global Credit Ratings has withdrawn the rating accorded to PDM Holdings Limited’s Commercial Paper, as there is currently no Commercial Paper in issue.
Looking ahead, upward rating actions may arise from a demonstrated ability to profitably develop and sell projects, whilst simultaneously maintaining a steady development pipeline. This should be accompanied by low gearing and strong credit protection factors. Conversely, weakening property market fundamentals or material delays in completing developments that adversely affect revenues and cash flows, and/or unduly high gearing metrics beyond budgets could place pressure on the ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (April 2011)|
|Long term: A-(KE)|
|Short term: A2(KE)|
|Last rating (June 2017)|
|Long term: A-(KE)|
|Short term: A2(KE)|
|Commercial Paper: A2(KE)|
|Primary Analyst||Committee Chairperson|
|Eyal Shevel||Sheri Morgan|
|Sector Head: Corporate Ratings||Senior Analyst: Corporate Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Global Master Criteria for Rating Property Funds and Commercial Real Estate Companies, updated February 2018
PDM Holdings Limited Issuer Rating reports, 2011-17
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Commercial Paper||Commercial paper is a negotiable instrument with a maturity of less than one year.|
|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.|
|Loan To Value (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.|
|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.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|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.|
|Revaluation||Formal upward or downward adjustment to assets such as property or plant and equipment.|
|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.|
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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
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 credit ratings have been disclosed to PDM Holdings Limited with no contestation of the ratings.
The information received from PDM Holdings Limited and other reliable third parties to accord the credit ratings included:
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.