Announcements Corporate Rating Alerts

GCR downgrades Accelerate’s long term issuer rating to BBB-(ZA) and the Secured Notes ratings to A-(ZA)(EL) on account of weaker portfolio fundamentals and continued funding risks

Rating Action

Johannesburg, 24 August 2021 – GCR Ratings (“GCR”) has downgraded the national scale long-term issuer rating assigned to Accelerate Property Fund Limited (“Accelerate”, “the REIT” or “the fund”) to BBB-(ZA), whilst the national scale short-term rating has been maintained at A3(ZA). Concurrently, GCR has downgraded the long-term issue ratings of A-(ZA)(EL) assigned to the existing Senior Secured Notes. A Rating Watch Negative has been assigned to all ratings. The APF08 Notes were settled in full upon maturity and the related ratings have been withdrawn.

Rated Entity / Issue

Rating class

Rating scale

Rating*

Outlook / Watch

Accelerate Property Fund Limited

Long Term Issuer

National

BBB-(ZA)

Rating Watch Negative

Short Term Issuer

National

A3(ZA)

Senior Secured APF04 Notes

Long Term Issue

National

A-(ZA)(EL)

Rating Watch Negative

Senior Secured APF06 Notes

Long Term Issue

National

A-(ZA)(EL)

Rating Watch Negative

Senior Secured APF07 Notes

Long Term Issue

National

A-(ZA)(EL)

Rating Watch Negative

Senior Secured APF08 Notes

Long Term Issue

National

WD

Senior Secured APF09 Notes

Long Term Issue

National

A-(ZA)(EL)

Rating Watch Negative

Senior Secured APF10 Notes

Long Term Issue

National

A-(ZA)(EL)

Rating Watch Negative

Senior Secured APF11 Notes

Long Term Issue

National

A-(ZA)(EL)

Rating Watch Negative

Senior Secured APF12 Notes

Long Term Issue

National

A-(ZA)(EL)

Rating Watch Negative

Senior Secured APF14 Notes

Long Term Issue

National

A-(ZA)(EL)

Rating Watch Negative

Senior Secured APF15 Notes

Long Term Issue

National

A-(ZA)(EL)

Rating Watch Negative

Senior Secured APF16 Notes

Long Term Issue

National

A-(ZA)(EL)

Rating Watch Negative

*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 expected loss ratings assigned to the notes issued therefore differs from the ‘BBB(ZA)’ long-term senior unsecured credit rating of the Issuer.

Rating Rationale

The ratings downgrade reflects continuing weakness in Accelerate’s operating performance, primarily due to its vulnerability to ongoing pandemic related disruptions given its large exposure to metropolitan retail. As a result, the REIT’s leverage metrics have shown a sharp deterioration, although imminent asset sales and debt refinancing measures proposed are expected to stabilise the financial profile. The risk of further deterioration in the credit rating is still reflected in the Rating Watch Negative, but may be reviewed once all the transactions are concluded .

The COVID-19 pandemic has significantly impacted the REIT’s financial performance and credit profile. Accelerate’s property portfolio was impaired by a further R660m at FY21, following the R1bn impairment at FY20, which saw the value of its portfolio decline to R11.8bn. Much of the underperformance and devaluation has derived from the core Fourways Mall (around 40% of the portfolio value), which as a super-regional mall with a large entertainment component has been particularly severely impacted by the pandemic. Although some improvement in trading has been evidenced during 2021, GCR expects its recovery to lag that of other property sectors. Nevertheless, over the longer term the mall will benefit from its central position in a densely populated and relatively affluent node.

The portfolio devaluation resulted in a significant spike in GCR’s calculated LTV ratio to 51%, from the already elevated level of 48% at FY20. In anticipation of the deterioration in its credit metrics, Accelerate secured covenant relaxations for the three measurement periods leading up to September 2021. The LTV covenant limit was increased to 55% for both the group and secured SPV from 50% and 45% respectively, while the interest cover covenant was revised down to 1.8x from 2.0x. After making adjustments for exceptional costs such as rental relief and other non-cash costs, the REIT’s calculated interest cover of 2x complied with the relaxed covenant limit.

Accelerate is proceeding with its intention to sell its European assets, which is expected to provide support to the funding profile. Following the repayment of the related Euro debt, the REIT expects to receive around R600m in net proceeds. These will be used to repay domestic debt facilities, which should see the overall LTV fall to around 41% and the SPV LTV to 42%. There are also around R200m in asset sales that are expected to transfer before 1H FY22 with the proceeds to be used to redeem debt, whilst the REIT has a larger sales pipeline of R759m whose proceeds will be used to further reduce debt as required and to fund the future development of core investment properties. In light of the proposed asset sale and debt repayment, GCR does expect Accelerate’s credit metrics to fall within covenant limits post September 2021, albeit pressures will persist until operating performance improves.

Accelerate is also in the process of simplifying its debt structure, and extending short term maturities. Agreements in principal have been reached with its main bankers to extend facilities maturing before September 2022. Additional facilities may also be received from existing funders, which will be used to repay some of the smaller noteholders. Thus, while Accelerate has a very weak liquidity profile as at FY21, facing R1.6bn in short term debt and negligible cash and unutilised facilities, under the assumption that asset sales and debt refinancing materialises without delay, GCR’s uses versus sources coverage for 12 months is adequate at 1.3x.

The sale of the European portfolio will further increase property concentration concerns within Accelerate’s portfolio, with the Fourways node likely to account for over 50% of the portfolio value. This amidst a weak environment that saw the retail vacancy rate climb to 8.5% at FY21 (FY20: 6.5%). However, Accelerate has extended its weighted average lease maturity profile to 6.1 years at FY21, with the strong baseline of income over medium to long term providing Accelerate some leeway to manage its funding obligations, even amidst shorter-term performance weaknesses.

With respect to the secured SPV, although the security pool’s external valuations declined to R7.2bn, GCR’s modelled assumptions for the Senior Secured Note support a stressed recovery rate of 81% from the security pool. This qualifies for a three-notch national scale uplift from the issuer rating albeit that little headroom remains for further devaluations before the notching uplift may be reduced. GCR has therefore affirmed the ratings on the existing notes.

Outlook Statement

The Rating Watch Negative reflects the potential for additional downgrades if the proposed assets sales and the refinancing activity are not timeously concluded, as this will greatly increase the likelihood of a covenant breach, and place the REIT under significant liquidity pressure.

Rating Triggers

The rating outlook could return to stable if the REIT’s operating performance stablises, with a rebound in rentals and performance metrics, alongside the conclusion of the asset sales and refinancing agreements, helping to strengthen credit protection metrics and lengthen the debt maturity profile. Aside from the immediate refinancing concerns, the rating could be downgraded if operating performance further deteriorates beyond our expectations and places additional pressure on the financial profile post the current debt reduction efforts.

A downgrade of the issuer ratings would necessarily translate to a downgrade of the Secured Bond ‘EL’ ratings. The rating could also be downgraded if the value of security declines further, such that expected recoveries fall below the 80% level.

Analytical Contacts

Primary analyst

Eyal Shevel

Sector head: Corporate Ratings

Johannesburg, ZA

Shevel@GCRratings.com

+27 11 784 1771

     

Committee chair

Sheri Morgan

Senior Analyst: Corporate Ratings

Johannesburg, ZA

Morgan@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, July 2021

GCR’s Country Risk Score report, published August 2021

GCR’s SA Sector Risk Score report, published April 2021

Ratings History

Accelerate Property Fund Limited

Rating class

Review

Rating scale

Rating

Outlook/Watch

Date

Long term Issuer

Initial

National

BBB+(ZA)

Stable Outlook

Feb 2014

Short Term Issuer

Initial

National

A2(ZA)

Long term Issuer

Last

National

BBB(ZA)

Negative Outlook

Aug 2020

Short Term Issuer

Last

National

A3(ZA)

Stock Code

Review

Rating scale

Rating*

Outlook/Watch

Date

APF04

Initial

National

AA-(ZA)

Stable

Oct 2016

Last

National

A(ZA)(EL)

Negative

Jun 2021

APF06

Initial

National

AA-(ZA)

Stable

Aug 2017

Last

National

A(ZA)(EL)

Negative

Jun 2021

APF07

Initial

National

AA-(ZA)

Stable

Jun 2018

Last

National

A(ZA)(EL)

Negative

Jun 2021

APF08

Initial

National

AA-(ZA)

Stable

Jul 2018

Last

National

A(ZA)(EL)

Negative

Jun 2021

APF09

Initial

National

AA-(ZA)

Stable

Jul 2018

Last

National

A(ZA)(EL)

Negative

Jun 2021

APF10

Initial

National

AA-(ZA)(EL)

Stable

Oct 2019

Last

National

A(ZA)(EL)

Negative

Jun 2021

APF11

Initial

National

AA-(ZA)(EL)

Stable

Oct 2019

Last

National

A(ZA)(EL)

Negative

Jun 2021

APF12

Initial

National

A(ZA)(EL)

Negative

Aug 2020

Last

National

A(ZA)(EL)

Negative

Jun 2021

APF14

Initial

National

A(ZA)(EL)

Negative

Sep 2020

Last

National

A(ZA)(EL)

Negative

Jun 2021

APF15

Initial

National

A(ZA)(EL)

Negative

Feb 2021

Last

National

A(ZA)(EL)

Negative

Jun 2021

APF16

Initial

National

A(ZA)(EL)

Negative

Jun 2021

Last

National

A(ZA)(EL)

Negative

Jun 2021

* 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.

RISK SCORE SUMMARY

Rating Components & Fcators

Risk scores

 

 

Operating environment

13.00

Country risk score

7.00

Sector risk score

6.00

   

Business profile

(0.75)

Portfolio quality

(0.75)

Management and governance

0.00

   

Financial profile

(2.50)

Leverage and Capital Structure

(2.00)

Liquidity

(0.50)

   

Comparative profile

0.00

Group support

0.00

Peer analysis

0.00

   

Total Score

9.75

Glossary

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.

Margin

A term whose meaning depends on the context. In the widest sense, it means the difference between two values.

Maturity

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

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.

Short Term Rating

See GCR Rating Scales, Symbols and Definitions.

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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

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 2021 audited annual financial statements (plus four years of audited comparative numbers);
  • analyst presentations, and SENS announcements;
  • breakdown of debt facilities available and related counterparties at 31 July 2021;
  • breakdown of the secured property portfolio at 31 July 2021;
  • covenant compliance certificate for the March 2021 measurement date.
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