Johannesburg, 30 June 2016—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. Concurrently, the commercial paper rating of A2(KE) has also been affirmed. The rating(s) are valid until 30 June 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to PDM Holdings Limited based on the following key criteria:
PDM is an affiliate of the Aga Khan Development Network (“AKDN”), providing a captured tenant base for its own properties and a very large portfolio of properties to manage and optimise. However, to drive growth, PDM is pursuing private sector development opportunities by positioning itself as preferred partner for property developers in Kenya. The property portfolio reports high concentration in terms of the number of properties (four income generating properties) and exposure to key tenants. While this is mitigated by the fact that many of the tenants are related parties and of high credit quality, the long term objective is to diversify the portfolio.
Most noticeable during F15 was the uptick in rental income across all properties, despite gross lettable area (“GLA”) remaining the same, attesting to the strong demand for the high quality premises PDM provides. This resulted in a higher yield of 9.2% (F14: 8.8%), with the yield registering at a higher 11% excluding Vienna Court and Roscoe Road properties, which are under development. With the planned completion of Vienna Court in F16, and other developments thereafter, revenue is budgeted to rise robustly over the medium term. Much of the imminent development activity will focus on for sale projects, which offer a faster cash flow cycle. Although this targets a diversified client base, it exposes PDM to volatility in housing demand.
Gross debt rose to KES585m at FYE15 (FYE14: KES147m), with the gross LTV ratio rising to 10.2% at FYE15 (FYE14: 3.2%). Similarly, although debt to EBITDA spiked to 184%, it is very conservative for a property company (FYE14: 52%). The development pipeline could see debt increase significantly over the period to 2020, but gearing metrics are expected to remain within GCR’s benchmark for highly rated property groups. Albeit low, debt has historically mainly been short term in nature. To align more appropriately with its long term asset base and development requirements, as well as to allow the company to realise the potential security value of its unencumbered properties, PDM is in the process of negotiating new debt facilities. Most of the debt will be raised at project level, and will have no recourse to PDM.
Upward rating migration is dependent on the long term growth in PDM’s property portfolio. The successful completion and commercialisation of development initiatives would markedly increase the portfolio size and revenue base. If accompanied by low gearing and strong credit protection factors, this could precipitate a ratings upgrade. Conversely, material delays and/or cost overruns would impact earnings, cash flows and debt serviceability driving much weaker than budgeted levels, and could adversely impact the ratings.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (April 2011)|
|Long term: A-(KE); Short term: A2(KE); Commercial Paper: n.a|
|Last rating (June 2015)|
|Long term: A-(KE); Short term: A2(KE); Commercial Paper: A2(KE)|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updates February 2016
Criteria for Rating Property Funds, updated May 2016
PDM Rating reports, 2011-2015
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|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.|
|EBITDA||Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.|
|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.|
|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.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate. Also an agricultural term describing output in terms of quantity of a crop.|
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.
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 rating(s) included:
- 2015 audited annual financial statements;
- Four years prior comparative financial statements;
- Details of ongoing and future capital projects;
- Details of funding facilities; and
- 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.
GCR affirms PDM Holdings Limited’s rating of A-(KE); Outlook Stable