Johannesburg, 21 June 2016 — Global Credit Ratings has today affirmed the national scale ratings accorded to Rebosis Property Fund Limited of A-(ZA) and A1-(ZA) in the long term and short term respectively, with the outlook accorded as Evolving.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Rebosis Property Fund Limited (“Rebosis, the REIT, or the fund”) based on the following key criteria:
Rebosis has made notable headway in the past two years with the acquisition of a 59% stake in Ascension, 67.5% of New Frontier and more recently, a R6bn agreement to acquire three Billion Group (“Billion”) retail assets and service businesses. Coupled with external acquisitions set to close in the short term, this is expected to raise the value of consolidated investments per IFRS to c.R29bn by FYE16 (R25.5bn including the Billion assets alone), placing it amongst SA’s upper tier listed REITs. Nevertheless, there remain several hurdles before the transactions are finalised, whilst gearing could be higher than current levels. The Evolving outlook accorded therefore reflects both the potential upward rating impact of these changes, as well as downward movement that would be warranted if high gearing metrics and a lumpy debt maturity profile persist.
GCR expects the contractual operating margin to ease from the highs reported over most of the review period, mainly due to the higher retail and commercial office exposures, although it is expected to range between 60%-70%, on the back of strong internal cost discipline. The performance expectation also takes note of escalations in utility tariffs, rates and taxes amidst weak GDP growth. Sound external growth expected from the offshore REIT will also balance investment risk and Rand hedge benefits through the cycle.
At 1H F16, Rebosis’ consolidated net LTV ratio was reported at 49%. However, cognisance is taken of the fact that Ascension and New Frontier debt is non-recourse to Rebosis. Rebosis’ exposure to these funds is therefore solely to the value of its investment in the two counters, and it is against this value that it raised debt on its own balance sheet. Accordingly, the company gearing metrics depict Rebosis’ credit risk profile more concisely. Although the company net LTV registered at 34% at 1H F16 (FYE15: 36%), the higher debt related to the Billion assets will raise this metric above the 40% upper limit for ‘A’ band REITs and will markedly distort debt to EBITDA ratios.
Rebosis had tapped most of its banking lines at 1H F16, although GCR notes work in progress to refinance R1.2bn in company debt maturing by 31 December 2016, improve the Billion debt maturity profile and settle certain loans. The DMTN programme lends funding flexibility, albeit subdued DCM activity and steeper swop curves currently elevate refinancing risk. GCR therefore expects timely capital raising and improvements to the debt maturity profile by FYE17, as failure to achieve this would warrant a ratings downgrade. Comfort in the interim is taken from the ample over-collateralisation of debt (2.4x including Billion assets), as well as a strongly performing underlying asset pool, evidenced by a sound weighted average lease expiry, low vacancies, positive reversions and a mainly ‘A’ rated lessee profile.
The timely refinancing of maturing debt to be achieved by FYE16 is essential to sustaining the ratings. Rating uplift going forward will derive from finalisation of aforementioned acquisitions and operational streamlining, achieved on the back of conservative gearing and a well-spaced debt maturity profile. LTV metrics persisting outside the upper limits for ‘A’ rated REITs, even due to the aforementioned acquisitions will result in negative rating action. While GCR notes the drag on earnings due to recent transactions, rolling debt to EBITDA ratios are expected to be managed down towards the 400% threshold for highly rated REITs.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (April 2015)||Last rating (June 2016)|
|Long term: A-(ZA); Short term: A1-(ZA)||Long term: A-(ZA); Short term: A1-(ZA)|
|Outlook: Stable||Outlook: Evolving|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Corporate Entities, updated February 2016
Global Criteria for Rating Property Funds, updated May 2016
Rebosis Issuer Report, April 2015
|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.|
|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.|
|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.|
|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.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|Hedge||A form of insurance against financial loss or other adverse circumstances.|
|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 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.|
|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.|
|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.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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 Margin||Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|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.|
|REPO||In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Secured Debt||Debt backed with or secured by collateral to reduce lending risk and thus the interest rate charged.|
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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; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Rebosis Property Fund Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of the information received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to Rebosis Property Fund Limited with no contestation of the ratings.
The information received from Rebosis Property Fund Limited and other reliable third parties to accord the credit ratings included;
- Audited financial results for 2015
- Four years of comparative audited numbers
- Unaudited interim results for the six months ending February 2016
- A breakdown of facilities available and related banking counterparties
- 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.
GCR affirms Rebosis Property Fund Limited’s rating of A-(ZA); Outlook Evolving.