Johannesburg, 28 July 2017 — 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 Stable. 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 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to TPS Eastern Africa Limited (“TPSEA” or “the group”) based on the following key criteria:
GCR takes cognisance of TPSEA’s well-established hotel and hospitality network, trading under the Serena brand, and consistent support from its key shareholder, the Aga Khan Fund for Economic Development, S.A (“AKFED”). However, the ratings have come under pressure from the effects of exogenous shocks to operating performance. Revenue continues to trend below the FY13 high of KES6.8bn, albeit having recovered to KES6.5bn in FY16, with expectations of sound top line performance in FY17. Earnings have also shown material variability over the five-year review period, although management intervention and market stability saw EBITDA rise by 78% to KES984m in FY16, supporting a modest net profit after the loss reported in FY15.
Domestic tourism volumes continue to recover from the adverse effects of the threat of terrorism (amongst other developments), which previously severely curtailed TPSEA’s performance. This has been achieved on the back of extensive state investment in security and sectoral incentives, which has seen the lifting of travel advisories in Kenya’s key holiday tourism markets. While the traction has continued into 2017, supporting sound safari circuit bookings and stronger hotel occupancies, the sector remains vulnerable to restrained business activity, or any disruptions curtailing international tourism in the wake of the August 2017 elections.
TPSEA also faces mixed fortunes in the region, with VAT impacting the Tanzanian lodges’ competitiveness, Uganda continuing to show robust tourism traction, Rwanda in flux due to regulatory changes, and opportunities opening up in the DRC (inter alia). Nevertheless, given the diversification of the portfolio and the recovery in core Kenyan assets, GCR expects the group to achieve sound profitability in FY17 to sustain the ratings.
Positively, the group remains relatively well-capitalised, which has eased the impact of ongoing facility drawdowns (to fund enhancements and expansions to certain hotels) on its credit risk profile. Specifically, gross debt has progressively risen to a new high of KES3.2bn at FY16 (FY15: KES2.6bn), with part of the increase attributable to the translation of USD-denominated loans. Net gearing closed FY16 at a conservative 27% (FY15: 26%), while net debt to EBITDA moderated from the review period high of 467% reported in FY15 to 229%. Interest cover rebounded to 2.9x, but free cash flow coverage of debt service obligations remains erratic, requiring sustained, strong cash generation to trend at sound levels.
TPSEA continues to leverage support from AKFED and other shareholders to augment its pool of directly owned and managed properties. This has included assistance with identifying and acquiring suitable hotels/resorts via equity partnerships, and with securing competitively priced term funding. Further drawdowns are expected from the cumulative USD28m in facilities secured from PROPARCO to fund upgrades to the Nairobi Serena Hotel and the Kampala Serena Hotel, although TPSEA will be expected to time this appropriately in order to remain within its internal net gearing limit of 40% (calculated before goodwill adjustments).
Looking ahead, upward ratings pressure could arise from a sound earnings trajectory in the medium term, supported by continued stability in the domestic operating environment and rising profitability of the regional operations. Conversely, protracted weak performance or losses due to a deterioration in the business or socio-political environment or adverse regulatory changes, resulting in volatile earnings based gearing and debt service metrics, could result in negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2009)|
|Long term: BBB+(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)|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2017
TPS Eastern Africa Limited rating reports, 2009-2016
RATING LIMITATIONS AND DISCLAIMERS
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|Commercial Paper||A negotiable instrument with a maturity of less than one year.|
|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 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.|
|Drawdown||When a company utilises facilities availed by a financial institution or an international lender there is said to be a drawdown of funds.|
|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.|
|Goodwill||Arises upon the sale/acquisition of a business and is defined as an established entity’s reputation, which may be regarded as a quantifiable asset and calculated as the price paid for a company over and above the net value of its assets|
|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.|
|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.|
|Net Profit||Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.|
|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 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.
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 2016 audited annual financial statements and four years of comparative numbers;
- detailed 2017 financial budgets;
- management accounts for the two months to 28 February 2017; 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 Stable.