Johannesburg, 30 Jun 2016 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to TPS Eastern Africa Limited of A-(KE) and A2(KE) in the long and short term respectively; with the outlook accorded as Negative. Concurrently, Global Credit Ratings has also affirmed TPS Eastern Africa Limited’s Commercial Paper rating of A2(KE). The ratings are valid until 30 June 2017. .
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to TPS Eastern Africa Limited (“TPSEA”) based on the following key criteria:
Tourist volumes have started to show signs of some recovery following the lifting or moderation of travel advisory recommendations in Kenya’s key holiday tourism markets. Government efforts to stabilise the industry, including VAT exemptions and a higher budgetary allocation for 2016/17, also bode positively for medium term prospects. Nonetheless, in view of the likely lagged effect in terms of spinoffs filtering down to improve industry earnings, GCR has maintained a Negative Rating Outlook on the Kenyan tourism industry, and will continue to monitor the socio-political and business climate in the run-up to the 2017 elections.
Some stability towards year end and throughput from a weaker Shilling contained the contraction in TPSEA’s top line to 2% in F15, albeit that revenue of KES6.2bn is well off the F13 high of KES6.8bn. The falloff in mostly coastal and lodge occupancies drove margins sharply down to 2% in F15, from 5.6% previously. This translated to successive YoY declines in operating profit over the last two years, registering at a review period low of just KES125m in F15. Including a large fair value loss related to interest on USD-debt, TPSEA reported a loss of KES297m in F15, against expectations of a modest profit. Debt service metrics thus contracted to new lows, with net interest cover registering below 1x and operating cash flow covering just 6% of debt.
1Q F16 performance remained constrained by weak occupancies in the low season, although management expects the full year to be profitable, on the back of a recovery in peak season volumes. GCR has factored industry cyclicality into its analysis, and while it is difficult to predict when profitability will normalise, the strong urban hotel footprint and resilient safari circuits is expected to minimise losses through the cycle.
Debt has trended around the KES1.5bn to KES2.5bn range over most of the years under review, climbing to KES2.6bn at FYE15 (FYE14: KES2bn). While gross and net gearing remained conservative, at 31% and 26% respectively (FYE14: 22%; 19%), gross and net debt to EBITDA ratios were strained, at a respective 467% and 389% (FYE14: 254%; 218%). The volatility in earnings based gearing is considered characteristic of the industry, although protracted elevations will place strain on the ratings.
TPSEA invests extensively in its properties through continual enhancements. While curtailed cash generation has limited its ability to fund a sizeable proportion of this internally, note is taken of proven support from the group’s primary shareholder, the Aga Khan Fund for Economic Development, for past projects. This relationship has also facilitated access to facilities from development finance institutions. Specifically, TPSEA recently secured a cumulative USD28m in long term facilities for improvements to Nairobi Serena Hotel and Kampala Serena Hotel, which will be conservatively drawn down to adhere to the group’s net gearing limit of 40%.
Upward rating migration is considered unlikely in the short term. That said, upward rating progression is dependent on TPSEA’s ability to capitalise on positive local developments and the rising profitability of its regional operations to ease variability in profits and cash flows. Protracted weak performance and/or losses due to suppressed tourism volumes or adverse regulatory changes would warrant negative rating action. Should ongoing capex projects materially elevate gearing/drive funding strain, this would also be negatively viewed.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2009)|
|Long term: BBB+(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
Global criteria for rating corporate entities, updated February 2016
TPS Eastern Africa Limited rating reports, 2009-2015
RATING LIMITATIONS AND DISCLAIMERS
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|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.|
|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.|
|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.|
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.
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 ratings have been disclosed to TPS Eastern Africa Limited with no contestation of the ratings.
The information received from TPS Eastern Africa Limited and other reliable third parties to accord the credit ratings included:
- the 2015 audited annual financial statements;
- four years of audited comparative numbers;
- detailed 2016 financial budgets;
- 1Q 2016 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.
GCR affirms TPS Eastern Africa Limited’s rating of A-(KE); Outlook Negative.