Announcements Corporate Rating Alerts

GCR downgrades Accelerate’s ratings on deteriorating sector dynamics and elevated gearing, Outlook Stable

Rating Action

Johannesburg, 27 March 2020 – GCR Ratings (“GCR”) has downgraded the national scale long term and short term Issuer ratings assigned to Accelerate Property Fund Limited (“Accelerate”, “the REIT” or “the fund”) to BBB(ZA) and A3(ZA), respectively, with a Stable Outlook. Concurrently, GCR has downgraded the long-term credit ratings assigned to the Senior Secured Notes issued by Accelerate to A(ZA)(EL) with a Stable Outlook.

Rated Entity / Issue Rating class Rating scale Rating* Outlook / Watch
Accelerate Property Fund

Limited

Long Term Issuer National BBB(ZA) Stable Outlook
Short Term Issuer National A3(ZA)
Senior Secured APF04 Notes Long Term Issue National A(ZA)(EL) Stable Outlook
Senior Secured APF05 Notes Long Term Issue National A(ZA)(EL) Stable Outlook
Senior Secured APF06 Notes Long Term Issue National A(ZA)(EL) Stable Outlook
Senior Secured APF07 Notes Long Term Issue National A(ZA)(EL) Stable Outlook
Senior Secured APF08 Notes Long Term Issue National A(ZA)(EL) Stable Outlook
Senior Secured APF09 Notes Long Term Issue National A(ZA)(EL) Stable Outlook
Senior Secured APF10 Notes Long Term Issue National A(ZA)(EL) Stable Outlook
Senior Secured APF11 Notes Long Term Issue National A(ZA)(EL) Stable Outlook

Rating Rationale

The Rating Downgrade is premised on weaker than anticipated leverage metrics amidst heightened funding pressures and elevated asset risks facing the South African property sector.

External debt was reported at R5.3.bn at 1H FY20 (FY19: R5.4bn), translating into an LTV ratio of a higher 41.8% (FY19: 39%) and leaving modest headroom on the debt covenant of 50%. Similarly, interest cover was reported at 2.2x, from 2.3x previously. Accelerate plans to dispose of a number of properties in order to reduce its outstanding debt. However, GCR considers it unlikely that the fund will achieve its LTV target of 35% over the short term due to the market upheaval which has impacted valuations and the pace of asset disposals. There was a material spike in the REIT’s net debt to operating income to above 7.0x, partly due to a distortion in its South African earnings ahead of the Fourways equalisation. Although some correction in operating income has since been achieved, additional earnings pressure is expected from the measures put in place by the South African government to combat the spread of the COVID-19 virus, which will disrupt the trading of retail centers and could thus impact rentals and the pace of renewals.

The fund’s liquidity coverage falls just short of the 1.0x for 12 months, partly due to upcoming debt maturities that are yet to be termed out, and due to relatively low headroom on unutilised facilities. Specifically, more than 50% of the fund’s outstanding facilities are scheduled to mature before December 2021, against GCR’s comfort level of 40%. While this remains a key concern, we have noted ongoing engagement with funders to term out certain facilities shortly. An improvement in the liquidity ratio and debt maturity profile will have to be achieved over the next six months to avoid further deterioration in the liquidity assessment.

The fund’s portfolio remained relatively flat at c.R12bn at 1H FY20, albeit the Fourways Mall equalisation, which was only completed after the half-year period, will result in the accretion of value. The completion and equalization of the mall is considered to enhance portfolio quality, although GCR will only improve the portfolio quality assessment once occupancies and trading densities stabilise at targeted levels.

For the Secured Notes’ ratings, GCR incorporated the latest external property values including Fourways Mall in its analysis. The overall estimated recovery rate calculated based on the assumption of debt drawn down to the covenant level of 45% remained relatively unchanged at 84.0%, from 84.9% previously. However, cognisance is taken of the sector-wide pressure on property valuations and the prolonged period anticipated for the disposal of properties in the prevailing economic climate. As such, and in light of the downgrade on the issuer rating of Accelerate, the ratings for the Senior Secured Notes have also been downgraded to A(ZA)(EL).

Outlook Statement

The Stable Outlook takes into account our expectations that the Fourways equalisation should further anchor the REIT’s balance sheet and support improved earnings stability through the cycle.

Rating Triggers

A ratings uplift is considered unlikely in the prevailing economic climate. Conversely, further negative action could be taken due to 1) delays in terming out upcoming maturities placing further pressure on liquidity; 2) sustained proximity to covenants due to a slower than expected progression towards more conservative leverage or 3) earnings underperformance at key properties.

Analytical Contacts

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
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 January 2020
GCR’s SA Sector Risk Score report, published March 2020
Pressure on valuations, soft equity prices signal weakening REIT financial profiles, March 2020
GCR Special Report – Corporate Performance in Infected by COVID-19, March 2020

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) Stable Outlook Aug 2019
Short Term Issuer Last National A2(ZA)
Stock Code Review Rating scale Rating* Outlook/Watch Date
APF04 Initial National AA-(ZA) Stable Outlook Oct 2016
Last National AA-(ZA)(EL) Oct 2019
APF05 Initial National AA-(ZA) Stable Outlook Aug 2017
Last National AA(ZA)(EL) Oct 2019
APF06 Initial National AA-(ZA) Stable Outlook Aug 2017
Last National AA-(ZA)(EL) Oct 2019
APF07 Initial National AA-(ZA) Stable Outlook Jun 2018
Last National AA-(ZA)(EL) Oct 2019
APF08 Initial National AA-(ZA) Stable Outlook Jul 2018
Last National AA-(ZA)(EL) Oct 2019
APF09 Initial National AA-(ZA) Stable Outlook Jul 2018
Last National AA-(ZA)(EL) Oct 2019
APF10 Initial National AA-(ZA)(EL) Stable Outlook Oct 2019
Last National AA-(ZA)(EL) Oct 2019
APF11 Initial National AA-(ZA)(EL) Stable Outlook Oct 2019
Last National AA-(ZA)(EL) Oct 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 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

Risk scores Accelerate Property Fund Limited
Operating environment 14.00
Country risk score 7.50
Sector risk score 6.50
Business profile (0.50)
Portfolio quality (0.50)
Management and governance 0.00
Financial profile (2.50)
Leverage and Capital Structure (1.50)
Liquidity (1.00)
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Score 11.00

Glossary

Collateral Asset provided to a creditor as security for a loan or performance.
Cost Ratio The ratio of operating expenses to operating income. Used to measures a bank’s efficiency.
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.
Coverage The scope of the protection provided under a contract of insurance.
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.
Diversification Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
DMTN Domestic Medium-Term Note.
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
Gearing Gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by EBITDA, the value of investments, or by operating income.
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 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.
Lessee The party that enjoys temporary use of a corporeal thing.
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.
Loan A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond.
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.
Operating Profit Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.
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.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
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.
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.

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 2019 audited annual financial statements (plus four years of audited comparative numbers);
  • unaudited consolidated results for the six months ended December 2019;
  • presentations, SENS announcements and roadshows;
  • a breakdown of debt facilities available and related counterparties at 31 December 2019;
  • a breakdown of the secured property portfolio at 31 December 2019;
  • latest property valuation reports;
  • covenant compliance certificate dated September 2019.
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