Johannesburg, 15 July 2021 – GCR Ratings (“GCR”) has affirmed 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 the ratings is Stable.
*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 ratings reflect Vukile’s high quality, geographically diversified portfolio of largely convenience-based retail properties in South Africa and Spain, as well as its commitment to preserving the balance sheet and liquidity.
Vukile’s high-quality R33bn property portfolio mostly consists of a mix of non-metropolitan, convenience-based shopping centres and retail parks, underpinned by a strong national/international tenant mix, which has supported its relatively sound performance through the COVID-19 pandemic. Vukile’s markets have been negatively impacted by numerous restrictive lock-down protocols, with rental concessions and lower collection rates at the onset of the outbreak tempering its operating performance in FY21. However, rental collections have rebounded strongly and remain resilient (above 90% of billings), and shopping patterns are returning to pre-Covid trends as trading conditions open up to various degrees in both territories. Performance has also benefitted from its exposure to grocery store anchor tenants and other essential service providers (a third of rents in South Africa), contributing to still low overall vacancy levels in FY21 (3.9% in South Africa and 1.7% in Spain). Whilst pressures remain in view of the weaker letting environment and likelihood of a more protracted economic recovery in South Africa, this is balanced by its portfolio diversification into a lower-risk country with a stronger economic backdrop as the effects of the pandemic moderate. We believe this should translate into improved cash flows over the rating horizon.
GCR also notes that the utilisation of proceeds from recent asset sales to pay down debt has somewhat cushioned the leverage profile. The REIT’s LTV ratio moderated from 46.1% at FY20 to 42.8% at FY21, and we expect leverage to show stability and trend around the 40%-45% level over the medium-term, remaining within our sensitivity range. Interest cover fell to 3.5x in FY21 (FY20: 6.3x), a level that is weaker but still strong, whilst debt to operating income is expected to remain strained until earnings improve well into 2022/23. As anticipated, the substantial reduction of currency risk from the conversion of recourse EUR debt with ZAR facilities post FY21 and unwinding of the related derivative exposures is supportive of a more conservative capital structure. In tandem, this proactive refinancing has also extended its debt maturity profile, with low debt expiries of R924m due in FY22.
Vukile has been actively strengthening its liquidity position. Continued asset recycling by reduce its exposure to non-strategic markets/assets and adoption of a more conservative distribution policy should provide the REIT with additional liquidity and retained cash flow for potential debt repayment. The REIT also has low capex requirements over the near term as most major redevelopment projects across the portfolio were undertaken prior to the onset of the pandemic. Together with cash on hand and ample available committed facilities of around R2.5bn, supports strong liquidity coverage of 2x over the outlook period. GCR also notes good covenant headroom and demonstrated access to debt capital in multiple currencies, and across a wide range of funders. As with most domestic property funds, the liquidity assessment is constrained somewhat by high asset encumbrances of over 70%, which partly constricts alternative funding sources.
GCR’s modelled assumptions for the Senior Secured Group 1 Note (VKE10) support a stressed recovery rate of 100% from the security pool. This qualifies for a four-notch national scale uplift from the issuer rating.
The Stable Outlook reflects our expectations that Vukile will continue to prudently manage its capital structure and maintain its credit metrics within required ranges for the rating, despite pressures from pandemic related tailwinds.
Factors that could lead to an upgrade include 1) meaningful portfolio growth, particularly if it into lower risk jurisdictions; 2) renewed, sustained earnings and cash flow growth; 3) strengthening of credit protection metrics.
Conversely, GCR could take negative rating action if 1) the LTV trends above 45% on a sustained basis; 2) net interest dips below 3.5; 3) if operating performance weakens materially; 4) and any liquidity challenges.
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 national scale issuer credit rating, downward migration of the issuer ratings could translate to a downgrade of the Group 1 Notes’ ratings.
|Primary analyst||Sheri Morgan||Senior Analyst: Corporate Ratings|
|Johannesburg, ZA||Morgan@GCRratings.com||+27 11 784 1771|
|Committee chair||Yohan Assous||Sector Head: Structured Finance Ratings|
|Johannesburg, ZA||YohanGCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|GCR Rating Scales Symbols and Definitions, May 2019|
|Criteria for Rating Real Estate Investment Trusts and Other Commercial Property Companies, May 2019|
|GCR’s SA Corporate Sector Risk Score report, April 2021|
|GCR’s Commercial Property Sector Risk Score report, July 2021|
|GCR’s Country Risk Score report, July 2021|
|Criteria for Secured Bond Expected Loss Credit Ratings, July 2021|
Vukile Property Fund Limited
|Rating class/Stock code||Review||Rating scale||Rating1||Outlook/Watch||Date|
|Long Term Issuer||Initial||National||A(ZA)||Stable Outlook||Feb 2012|
|Short Term Issuer||National||A1(ZA)|
|VKE10||Initial||National||AA+(ZA)||Stable Outlook||May 2017|
|Long Term Issuer||Last||National||AA-(ZA)||Stable Outlook||Sep 2020|
|Short Term Issuer||National||A1+(ZA)|
|VKE10||Last||National||AAA(ZA)(EL)||Stable Outlook||Sep 2020|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||8.50|
|Sector risk score||6.75|
|Management and governance||0.00|
|Leverage and capital structure||(1.25)|
|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.|
|Liquidity coverage ratio||Also referred to as the sources vs. uses assessment of liquidity. GCR calculates an entity’s cover of its upcoming liquidity requirements (including debt refinancing, lease and capital commitments, planned acquisitions, and distributions) from existing sources (including committed/secured debt facilities that are unutilised, cash from disposals, fully underwritten equity raises, discretionary cash flows, and unrestricted cash). The assessment typically covers a period of 12 months.|
|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.|
|SOCIMI||Sociedades Cotizadas De Inversión En El Mercado Inmobiliario, a Spanish REIT.|
|WALE||Weighted average lease expiry.|
|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.|
1Vukile’s Senior Secured Notes 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. Should 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.
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 audited 2021 annual financial statements (plus four years of audited comparative numbers)
- Results presentations
- Details of facilities and other treasury data, at May 2021
- Covenant confirmation certificates, March 2021
- Property valuation documents of the Group 1 Property Portfolio
- Forecast income and expenses per property in respect of the Group 1 Property Portfolio
- Vacancy and arrear levels per property in respect of the Group 1 Property Portfolio