Johannesburg, 14 June 2017—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 ratings are valid until 30 June 2018.
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 some of its own properties and a portfolio of properties to manage. 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 remains concentrated, given the limited number of 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 longer term objective is to diversify the portfolio.
Following the completion of Vienna Court, the value of the direct property portfolio rose by 21% to KES6.9bn at FY16. Strong demand for PDM’s high quality properties is evidenced by the relatively low vacancies at most premises and the revaluations achieved YoY. However, rentals and escalations have become pressurised recently, leading to marginal growth of 4% in total rental income in FY16. Medium term revenue is budgeted to rise robustly, as occupancies at Vienna Court improve and planned developments are completed, although the trajectory could be lumpy depending on the timing of unit sales.
Debt has historically been negligible, although, the evolving development pipeline has seen PDM’s gearing levels rise over the past two years, with the gross LTV ratio reaching 16% (FY15: 10%). This trend is expected to continue, with gross debt projected to peak around KES3.5bn by 2019 if all the projects come to fruition as planned. Nonetheless, management’s conservative capital management is expected to see leverage metrics remain within GCR’s benchmark for highly rated property groups.
Following a repositioning of the business strategy, projects in the short term pipeline are based on the build for-sale model, particularly in the residential segment. Whilst strong demand has historically been evidenced in this market segment, the apparent current slowdown in sales transactions may hider growth prospects, particularly given the speculative nature of projects.
Over the medium to longer term upward rating migration could be underpinned by PDM’s demonstrated ability to profitably develop and sell projects, whilst displaying strong growth in the rental portfolio and future development pipeline. This should be accompanied by low gearing and strong credit protection factors. Conversely, weakening property market fundamentals or material delays 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); Commercial Paper: n.a|
|Last rating (June 2016)|
|Long term: A-(KE); Short term: A2(KE); Commercial Paper: A2(KE)|
|Senior Analyst: Corporate Ratings|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updates February 2017
Criteria for Rating Property Funds, updated February 2017
PDM Rating reports, 2011-2016
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 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:
- 2016 audited annual financial statements and four years prior comparative financial statements;
- Details of ongoing and future capital projects; and
- Details of funding facilities;
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