Johannesburg, 29 Jun 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to TPS Eastern Africa Limited of A-(KE) and A2(KE) for the long and short term respectively; with the outlook accorded as Negative. Concurrently, Global Credit Ratings has also accorded TPS Eastern Africa Limited a Commercial Paper rating of A2(KE). The ratings are valid until 30 June 2016.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to TPS Eastern Africa Limited (“TPSEA”) based on the following key criteria:
The ratings remain strongly premised on TPSEA’s position as a well-established hotelier and hospitality services provider in East Africa, on the back of the international Serena brand. The ratings also take into cognisance the capital and operational support provided by TPSEA’s majority shareholder, the Aga Khan Fund for Economic Development (“AKFED”). That said, regional tourism has been negatively impacted by a slew of largely exogenous factors, the most prominent being terrorism threats, culminating in travel advisories in East Africa’s major markets, and cancellations prompted by the Ebola scourge. These adverse developments have been exacerbated by a punitive VAT regime in Kenya, which has negatively impacted the country’s competitiveness as the primary safari destination in the region. With Kenya’s coastal tourism significantly compromised, around 25 hotels have been closed in the low season, while the industry as a whole has temporarily shed around 45,000 jobs.
Against this backdrop, TPSEA’s revenue declined by 7% to KES6.3bn in F14, while a sharp reduction in margin (on the back of lower coastal and lodge occupancies as well as RevPAR) saw operating profit decline by 59% to KES356m in F14. Group margins have also been impacted by weaker USD rates, as Europe is TPSEA’s primary market. Although 1Q F15 numbers continue to reflect the impact of these challenges, adherence to strict cost containment measures is expected to see the group return a profit for the year. In view of the largely exogenous nature of these setbacks, it is difficult to forecast when profitability will normalise. This notwithstanding, TPSEA’s volumes are expected to be sustained by the strong urban hotel footprint and the resilient safari circuits evidenced in other East African countries. Given its long term view on its assets, TPSEA plans to raise new debt to fund enhancements, especially to the flagship Nairobi Serena Hotel. Comfort in this respect is taken from the institutional support for past issuances, DFI interest and the group’s conservative stance on net gearing (which is currently capped at 40%). With debt at KES2bn as at FYE14 (FYE13: KES1.8bn), net gearing remained low, at just 19% (FYE13: 16%). Weaker earnings, however, saw discretionary cash flows cover a low 3% of net debt (F13: 38%), net interest cover decline to 2.3x (F13: 6x) and net debt to EBITDA spike to 218% (F13: 119%). These measures remain aligned with the current ratings; although Global Credit Ratings will continue to closely monitor them for additional strain in the difficult environment.
In view of the particularly difficult operating climate, the ratings have therefore been placed on negative outlook. Although a rating upgrade is deemed unlikely in the challenging operating climate, the timely rollout of new capacity, coupled with conservative gearing metrics and sound debt serviceability, could support rating uplift in the medium term. However, protracted downward pressure on regional tourism volumes, translating to the persistence of much weaker than envisaged earnings, could warrant negative rating action. Were the planned capex projects to add significantly to debt and funding strain, this would also be negatively considered.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2009)|
|Long term: BBB+(KE); Short term: A2(KE)|
|Last rating (June 2014)|
|Long term: A-(KE); Short term: A2(KE)|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global criteria for rating corporate entities, updated February 2015
TPS Eastern Africa Limited rating reports, 2009-2014
|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.|
|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.|
|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.|
|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.|
|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.|
|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 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 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.|
|LC||An LC is a guarantee by a bank on behalf of a corporate customer that payment will be made if that entity cannot to meet its obligations.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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.|
|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 Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Redemption||The repurchase of a bond at maturity by the issuer.|
|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.|
|RevPAR||Revenue per available room-a ratio used to determine a hotel’s performance, which also allows for comparisons across various assets.|
|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.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
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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.
TPS Eastern Africa 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 rating/s has been disclosed to TPS Eastern Africa Limited with no contestation of the rating(s).
The information received from TPS Eastern Africa Limited and other reliable third parties to accord the credit rating(s) included:
- 2014 audited annual financial statements (and four years of comparative numbers);
- detailed 2015 financial budgets;
- 1Q 2015 management accounts;
- corporate governance and risk management framework, and
- a breakdown of facilities available and related counterparties.
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.