Announcements Corporate Rating Alerts

GCR affirms Vukile ratings following review of operating environment scores and redemption of Group 1 Notes; Outlook Stable

Rating Action

Johannesburg, 21 July 2020 – GCR Ratings (“GCR”) has updated the operating environment assessment supporting Vukile Property Fund Limited’s (“Vukile” or “the REIT”) national scale long-term and short-term issuer ratings of AA-(ZA) and A1+(ZA) respectively. Concurrently, the ratings assigned to outstanding Senior Secured Group 1 Notes issued by Vukile have been affirmed at AAA(ZA)(EL). The Outlook on all the ratings is Stable. Following the settlement in full of VKE07 and VKE09 Senior Secured Note obligations in June 2020 and July 2020 respectively, the related ratings have been withdrawn.

Rated Entity / Issue

Rating class

Rating scale

Rating*

Outlook / Watch

Vukile Property Fund Limited

Long Term Issuer

National

AA-(ZA)

Stable Outlook

Short Term Issuer

National

A1+(ZA)

Senior Secured VKE07 Notes

Long Term Issue

National

WD

Senior Secured VKE09 Notes

Long Term Issue

National

WD

Senior Secured VKE10 Notes

Long Term Issue

National

AAA(ZA)(EL)

Stable Outlook

*The Senior Secured Notes listed above are referred to as the Group 1 Notes. The secured note ratings provide an estimate of the expected loss in the event of an issuer default and are a function of the estimated probability of default of the issuer and the potential losses that may be incurred. As such, the ratings carry an ‘EL’ suffix.

The issuer rating action follows a reduction in country and sector risk assessments applicable to Vukile’s ratings. Specifically, GCR lowered the Country Risk Scores for South Africa and Spain by -0.5 to 7.00 and 10.50 respectively, in a Country Risk Score market alert released on the 27th May 2020. GCR has also progressively lowered the South African Property sector risk score to 6.0 in July 2020, from 7.0 in June 2019. Combined, the above country and sector risk scores underpinned the reduction in Vukile’s operating environment score, which is a key input into GCR’s Issuer ratings. Details of updates to GCR’s Country and Sector Risk Scores are outlined in the respective reports, available via the following link: https://gcrratings.com/risk-scores/

Rating Rationale

GCR lowered the Country Risk Scores for South Africa and Spain to reflect expectations of the impact of COVID-19 related disruptions to our GDP growth projections, as well as our view of the effectiveness of interventions to stabilise these economies. GCR has also lowered Vukile’s sector risk score, based on our view of heightened asset, funding and covenant risk in the industry. This is counterbalanced by our expectations of a softer downturn in GDP and a relatively quick economic rebound in Spain, as well as migration in earnings and asset contributions from Castellana to c.50%. Overall, the lowering of the anchor has not translated to downward pressure on the national scale ratings.

Vukile’s trading performance in South Africa has demonstrated resilience relative to peers, with a quick rebound in collections as COVID-19 restrictions eased. Arrears are expected to trend below GCR’s projections for retail, supported by the defensive positioning of assets. Spanish properties have similarly seen a rebound in trading post the lockdown, albeit normalisation of the rental collection profile is expected to lag the South African market somewhat. Vacancies remain well-controlled in both markets, supported by a defensive tenant mix. There may be increased tenant churn in South Africa in the short term, although rent reversions are expected to remain sustainable relative to peers.

Migration of the REIT’s overall LTV into the 45%-50% range at FY20 was driven by adverse exchange rate movements, as well as higher than planned debt levels, as certain acquisitions coincided with delays to the disposal pipeline. This pressure is counterbalanced by expectations of a quick pickup of interest cover and earnings-based leverage, as well as cash flows from progressing disposals. Initiatives to preserve cash and bolster liquidity have also been noted, which are also expected to stabilise the financial profile.

The ratings of the Group 1 Notes are derived by applying a notching approach, starting from the long-term senior unsecured corporate credit rating of the Issuer. The number of notches granted depends on the recovery prospects in the event of default and enforcement in a fire-sale scenario, as modelled by GCR, assuming that secured debt is in issue at the transactional covenant LTV of 45%. Supported by softening interest rate environment, modelled expected recovery rate from the Group 1 Notes’ security pool registered at 88%, from 85% previously. This qualifies for “Superior” recovery prospects, based on GCR’s Global Structurally Enhanced Corporate Bonds Rating Criteria. GCR has therefore maintained the three national scale notch uplift from the issuer ratings, with the outlook on the Senior Secured Notes rating reflecting the outlook on the issuer ratings.

Following the settlement of the R200m VKE07 and R378m VKE09 Senior Secured Note obligations in June 2020 and July 2020 respectively, outstanding Group 1 Notes amount to R194m, to be settled in July 2022. Independent open market valuations (“OMV”) as of September 2019 supported an LTV ratio of c.31% after the 08 July 2020 Senior Secured Note redemption.

Underlying performance of the secured portfolio remains sound, with YTD collections rebounding quickly, and arrears well contained relative to the market amidst the COVID-19 restrictions. The medium-term weighted lease maturity is well-profiled, underpinned by leases with first and second-tier nationals. The top 10 tenants contribute just over 45% of rental income, although this concentration is counterbalanced by consistently sound performance across the tenant mix. Coupled with high occupancies (c.98% of GLA), this is supportive of strong cash flows through the cycle.

GCR has considered that the external valuation certificates for the properties predate the onset of the COVID-19 crisis in its assessment. Nonetheless, GCR’s estimated recoveries incorporate substantial stresses on the OMV of the security pool. GCR also assumes higher outstanding debt obligations by modelling leverage up to the transactional LTV covenant. Assuming debt is issued up to the LTV covenant, the Group 1 Notes’ rating would have headroom to absorb a decline in OMVs of up to 10%, while sustaining “Superior” Recovery Prospects of approximately 80%-85%.

Outlook Statement

The Stable Outlook reflects our expectations that, notwithstanding the heightened uncertainty in the wake of the COVID-19 crisis, Vukile’s financial profile will remain relatively stable due to strong treasury management and proactive management of covenant risk. Due to considerable short-term market and economic uncertainty, however, GCR could revise the outlook if our view of industry prospects deteriorates further.

Rating Triggers

Upward issuer rating migration beyond the COVID-19 crisis could result from; 1) a demonstrable return to strong profitability, 2) further expansion into higher-rated jurisdictions and demonstrated value creation; 3) sustained reduction in LTVs towards the 30%-35% range. Conversely, GCR could take negative rating action if 1) pressure on Vukile’s credit risk profile persists beyond the short-term, due to protracted or more stringent COVID-19 restrictions; 2) if market uncertainty constrains the REIT’s ability to manage down leverage; 3) if the REIT’s strong liquidity and covenant risk management is constrained by delays in the disposal pipeline, heightened currency risk or weakened access to capital markets.

No positive uplift is applicable to the Group 1 Note ratings. As the ‘EL’ ratings are derived by applying a notching approach, starting from the long-term senior unsecured corporate credit rating of the Issuer, downward migration of the issuer ratings would likely translate to a downgrade of the Group 1 Notes’ ratings.

Analytical Contacts

Primary analyst

Patricia Zvarayi

Deputy Sector Head: Corporate Ratings

Johannesburg, ZA

patricia@GCRratings.com

+27 11 784 1771

     

Committee chair

Eyal Shevel

Sector Head: Corporate Ratings

Johannesburg, ZA

Shevel@GCRratings.com

+27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019

Criteria for Rating Real Estate Investment Trusts and Other Commercial Property Companies, May 2019

Criteria for Rating Secured Bonds, November 2018

GCR’s Country Risk Score report, published May 2020

GCR’s SA Sector Risk Score report, published July 2020

GCR Rating Scales Symbols and Definitions, May 2019

Ratings history

Vukile Property Fund Limited

Rating class/Stock Code

Review

Rating scale

Rating*

Outlook/Watch

Date

Long term Issuer

Initial

National

A(ZA)

Stable Outlook

February 2012

Short Term Issuer

Initial

National

A1(ZA)

VKE10

Initial

National

AA+(ZA)

Stable Outlook

May 2017

Long term Issuer

Last

National

AA-(ZA)

Stable Outlook

July 2019

Short Term Issuer

Last

National

A1+(ZA)

VKE10

Last

National

AAA(ZA)(EL)

Stable Outlook

August 2019

*Structured bond ratings are based on an estimate of the expected loss in the event of an issuer default and are a function of the estimated probability of default of the issuer and the potential losses that may be incurred. As such, the ratings carry an ‘EL’ suffix. The ratings are derived by applying a notching approach, starting from the issuer long term rating. Should the issuer rating or the estimated recovery rate calculated by GCR change, the ratings assigned to the Senior Secured Notes may also change. Prior to the publication of GCR’s Rating Scales, Symbols and Definitions in May 2019, structured bond ratings did not carry the ‘EL’ suffix.

Risk Score Summary

Rating Components & Factors

Risk scores

 

 

Operating environment

15.50

Country risk score

8.75

Sector risk score

6.75

   

Business profile

1.50

Portfolio quality

1.50

Management and governance

0.00

   

Financial profile

(2.00)

Leverage and capital structure

(1.00)

Liquidity

(1.00)

   

Comparative profile

0.00

Group support

0.00

Peer analysis

0.00

   

Total Score

15.00

Glossary

Asset

A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.

Bond

A bond or note is a long-term debt instrument issued by either a company, institution or the government to raise funds.

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.

Concentration

A high degree of positive correlation between factors or excessive exposure to a single factor that share similar demographics or financial instrument or specific sector or specific industry or specific markets.

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. In insurance, it refers to an individual or company’s vulnerability to various risks

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

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.

Issuer

The party indebted or the person making repayments for its borrowings.

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. 

Long Term Rating

See GCR Rating Scales, Symbols and Definitions.

Maturity

The length of time between the issue of a bond or other security and the date on which it becomes payable in full.

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.

Rating Outlook

See GCR Rating Scales, Symbols and Definitions.

REIT

Real Estate Investment Trust. A company that owns, operates or finances income-producing real estate.

Renewal

The re-establishment of the in-force status of a policy, the term of which has expired or will expire unless it is renewed.

Rent

Payment from a lessee to the lessor for the temporary use of an asset.

Risk

The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.

Short Term Rating

See GCR Rating Scales, Symbols and Definitions.

Weighted Average

An average resulting from the multiplication of each component by a factor reflecting its importance or, relative size to a pool of assets or liabilities.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to Vukile Property Fund Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

Vukile Property Fund Limited participated in the rating process via management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Vukile Property Fund Limited and other reliable third parties to accord the credit ratings included:

  • The reviewed 2019 annual financial statements (plus four years of audited comparative numbers)
  • Results presentations and market updates
  • Details of facilities and other treasury data
  • Executed transaction documents
  • Property valuation documents of the Group 1 Property Portfolio
  • Tenancy lease schedules as at March 2020
  • Forecast income and expenses per property
  • Vacancy and arrear levels per property

 

 

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