Johannesburg, 16 September 2020 – GCR Ratings (“GCR”) has assigned national scale long term issue ratings to the APF13 Notes issued by Accelerate Property Fund Limited (“Accelerate”, “the REIT” or “the issuer”) of A(ZA)(EL). Concurrently, GCR has affirmed the long-term issue ratings of A(ZA)(EL) assigned to the existing Senior Secured Notes. The Outlook on all the ratings is Negative. The APF11 Notes previously in issue were settled in full upon maturity and accordingly, the related ratings have been withdrawn.
*The Senior Secured Note 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, these ratings carry an “(EL)” suffix.
The Negative Outlook reflects sustained pressure on the commercial property sector, that has further weakened the issuer’s credit protection metrics. The issue rating is derived by applying a notching up from the national scale long term issuer rating. In this regard GCR affirmed the national scale issuer ratings accorded to Accelerate at BBB(ZA) and A3(ZA) in the long and short term respectively in August 2020, with a Negative Outlook.
Accelerate has issued the APF13 Notes in order to refinance the maturing APF11 Notes. The issuance does not represent an additional draw down of debt and therefore, the LTV will remain unchanged at 43%, with the temporary relaxation of the LTV covenant to 55% from 45% serving to increase headroom to the limit. Nonetheless, when GCR performs its recovery analysis, outstanding debt is assumed to be the maximum possible amount up to the LTV limit.
The security pool comprising retail, office and industrial properties had an aggregate independent valuation of R7.7bn at FY20. When calculating the estimated recovery rate from the collateral, stressed property values are determined based on reported vacancies and arrears, relative to threshold stress levels. The superior recovery prospect of 86% qualifies for a rating uplift which is equivalent to three national scale notches. As such, GCR assigned a rating of A(ZA)(EL) to the APF13 Note and affirmed the ratings on the existing Notes. The rating of the APF11 Note is withdrawn.
In GCR’s view, the South African commercial property sector is facing elevated asset risk, which in Accelerate’s case is borne out by the property value write downs reported at FY20. GCR performed an additional stress tests, which established that the estimated recovery rate would be able to sustain the same level of notching uplift assuming a modest deterioration in property values of 15%-20%.
The Negative Outlook reflects GCR’s view that earnings and funding pressure will persist across the property sector beyond the disruptions caused by COVID-19. This could limit Accelerate’s ability to stabilise its constrained financial profile in the absence of shareholder interventions beyond support of profit retention, which may potentially lower the starting point of the Secured Note rating analysis.
Negative action could be taken due to further deterioration in the operating environment and failure to comply with covenant relief conditions, which would significantly increase uncertainty of future debt serviceability. Further, if earnings do not recover to projected levels beyond the COVID-19 disruptions, credit protection metrics are likely to weaken. Upward rating progression is not expected over the rating horizon although a rebound in earnings, coupled with a reduction in leverage and the maintenance of good liquidity cover could support stabilisation of the Outlook. A downgrade of the issuer ratings would necessarily translate to a downgrade of the ‘EL’ ratings.
|Primary analyst||Tinashe Mujuru||Credit Analyst|
|Johannesburg, ZA||TinasheM@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|
|GCR Ratings Scales, Symbols & Definitions, 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, May 2020|
|GCR’s Commercial Property Sector Risk Score report, August 2020|
|Credit Spotlight: Issuer Credit Ratings, Issue Credit Ratings and Expected Loss Ratings, June 2020|
|GCR places South African commercial property on negative trend as fragile economy continues to drive high asset, liquidity and funding risks, August 2020|
Accelerate Property Fund Limited Senior Secured Notes
|Stock Code||Review||Rating scale||Rating*||Outlook/Watch||Date|
* 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 long-term issuer 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.
|Collateral||Asset provided to a creditor as security for a loan or performance.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|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.|
|DMTN||Domestic Medium-Term Note.|
|Issuer Ratings||See GCR Rating Scales, Symbols and Definitions.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Lease||Conveyance of land, buildings, equipment or other assets from one person (lessor) to another (lessee) for a specific period of time for monetary or other consideration, usually in the form of rent.|
|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.|
|Loan To Value||Principal balance of a loan divided by the value of the property that it funds. LTVs can be computed as the loan balance to most recent property market value, or relative to the original property market value.|
|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.|
|Proceeds||Funds from issuance of debt securities or sale of assets.|
|Property||Movable or immovable asset.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Refinancing||The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.|
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 Accelerate 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.
Accelerate Property Fund Limited participated in the rating process via face-to-face management meetings, tele-conferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Accelerate Property Fund Limited and other reliable third parties to accord the credit ratings included:
- the 2020 audited annual financial statements (plus four years of audited comparative numbers);
- presentations, SENS announcements and roadshows;
- breakdown of debt facilities available and related counterparties;
- breakdown of the secured property portfolio;
- latest property valuation reports;
- the final signed Applicable Pricing Supplement for the APF13 Note;
- final signed legal opinion in respect of the issuance of the APF13 note;
- covenant compliance certificate for the March 2020 measurement date.