Lagos Nigeria, 10 May 2019 — Global Credit Ratings has downgraded the indicative public rating assigned to Alpha Mead Funding Company Plc’s N1.45bn Series 1 Tranche A Fixed Rate Bonds to BBB(NG), with the outlook placed on ‘Rating Watch’. The indicative rating expires in November 2019.
Global Credit Ratings (“GCR”) has accorded the above rating to Alpha Mead Funding Company Plc’s (“the Issuer” or “AM-Funding”) Series 1 Tranche A Bonds based on the following key criteria:
The Issuer is a special purpose vehicle incorporated to raise funds from the debt capital market for its owners. The two companies that comprise AM-Funding are operationally integrated (albeit not a legally consolidated unit), with common shareholders. In May 2019, GCR downgraded the national scale long-term rating accorded to the Issuer to BBB-(NG) from BBB(NG).
In 2017, AM-Funding filed an application with Securities and Exchange Commission to issue short term bonds into the Nigerian capital market, under a N10bn Short Term Bond Programme (“STBP”). The Issuer had planned to issue N3.1bn under Series 1 Bonds (“the Bonds”) being a senior secured, to be split into two tranches (Tranche A – N2.0bn, Tranche B – N1.1bn). The Tranche A Bonds (with 18 months tenor) were to be redeemed at Par on the maturity date, while Tranche B Bonds (with 3 years tenor) will be redeemed in 6 equal instalments, with interest and principal payable semi-annually in arrears.
However, AM-Funding completed the shelf registration of the STBP and only raised N1.45bn from the capital market in April 2019, under a Series 1 Tranche A Bond Issuance, at a fixed interest rate of 19.76% and a maturity date of 27 June 2020. The Tranche A bonds will be redeemed over two redemptions, with the First Partial Redemption amount of N868m, due on 27 December 2019. The Final Redemption amount of N939.9m will be paid upon maturity of the Tranche A Bonds. The bonds constitute direct, unconditional and unsubordinated secured obligations of the Issuer. The proposed Series 1 Tranche B Bond Issuance has been put on hold.
Pursuant to the terms of the Series 1 Tranche A Trust Deed, the Issuer creates a security interest in the Payment Account and the Performance Bond and any other Transaction Account opened by the Issuer, in favour of the Trustees, in addition to the security granted in the All Assets Debenture. GCR notes from the executed Performance Bond that the insurance cover pertains solely to project completion risks, and will only crystallise if the construction of the underlying properties is not completed by the agreed delivery date. However, the project completion risk is only covered for a period of 4 months (not later than 30 May 2019), against initial plan of 10 months. GCR has also taken cognisance of the potential liquidity risk inherent in the Tranche A Bonds, given its short term tenor. As such, GCR accords more weighting to the security granted in the All Assets Debenture.
The indicative rating of the Series 1 Tranche A Bonds is derived by applying a notching up approach, starting from the long term unsecured corporate rating of the Issuer. Although GCR’s estimated recovery calculations suggest ‘Excellent’ recovery prospects, the amount that will be realised on the security package depends on the value stamped and registered with the government authorities. GCR has yet to receive evidence of payment into the Reserve Account for the perfection of the security package. Based on these considerations and the prolonged security perfection process in Nigeria, a one-notch uplift is considered appropriate for the Series 1 Tranche A Bonds. Accordingly, the Series 1 Tranche A Bonds have been accorded an indicative rating of BBB(NG), representing a downgrade from the initial indicative rating of BBB+(NG). The downgrade follows a similar downgrade of the Issuer rating. The ‘Rating Watch’ also reflects the Issuer’s rating outlook.
The indicative rating accorded to the Series 1 Tranche A Bonds relates to ultimate payment of interest and payment (as opposed to timely, akin to an expected loss rating, which is a function of probability of default and loss severity). A downgrade in the rating of the Issuer; and an adverse change in the recovery prospects could trigger a negative rating action.
The final rating will be accorded upon receipt of: evidence of payment into the Reserve Account for security perfection; and final legal opinion.
NATIONAL SCALE RATINGS HISTORY
Initial/last rating (October 2018)
Series 1 Tranche A: BBB+(NG)
Rating outlook: Stable
+234 1 9049462
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Global Summary Structurally Enhanced Corporate Bonds Rating Criteria (November 2018)
Alpha Mead Funding Company Plc Issuer rating reports, 2017-19
Glossary of terms/ratios, February 2018.
RATING LIMITATIONS AND DISCLAIMERS
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the rating expires in November 2019.
The Issuer and the Lead Issuing House participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to the Issuer.
The information received from Alpha Mead Funding Company Plc to accord the credit ratings included;
• 2017 full-year management accounts (plus four years of comparative numbers),
• 9-month management accounts to 30 September 2018;
• Information specific to the rated entity and/or industry was also received,
• Information relating to the Bond Issue;
Executed Series 1 Tranche A Trust Deed;
Executed Series 1 Tranche A Account Bank Agreement;
Executed Series 1 Tranche A Inter-Company Bond Issuance Agreement;
Executed All Assets Debenture;
Base Shelf Prospectus;
Series 1 Tranche A Pricing Supplement;
Executed Performance Bond – Lekki Pearl Construction I; and
Executed Performance Bond – Green Park Infrastructure.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.