Johannesburg, 01 November 2018 — Global Credit Ratings has downgraded Cytonn Investments Management Plc’s national scale Issuer ratings to B(KE) and B(KE) in the long and short term respectively; with the outlook accorded as Evolving. The commercial paper rating has been withdrawn without affirmation, as there is no commercial paper in issue.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Cytonn Investments Management Plc (“Cytonn” or “the group”) based on the following key criteria:
The ratings are currently constrained by Cytonn’s curtailed access to capital given limited recourse to bank facilities. As such, group debt is largely comprised of short dated loans/notes from mezzanine investors, albeit this has moderated to a 60:40 split with the increased investment by Taaleri Africa Fund (“Taaleri”). While mezzanine debt is typically rolled over, the overall funding profile reflects refinancing and liquidity risk, as the investment manager’s capital-intensive real estate offering requires diversified funding sources/multiple financing relationships.
Accordingly, AIM and NSE listings are planned for 2019, with c.GBP40m to be raised from the former with a view to achieving and sustaining an LTV of 50%. Taaleri’s commitment to take up a 20% stake following on a cumulative KES5bn investment in group projects bodes positively, with note taken of the five-year notes issued in FY18. Plans to issue guaranteed, three-year project notes backed by cash flows from certain projects, the procurement of fund licences and ongoing engagement with financial institutions will also add funding flexibility. That said, Cytonn reflects negative earnings-based gearing, on the back of operating losses. As such, a trajectory of robust profitability will have to be achieved to support sound debt to EBITDA and debt serviceability ratios.
While the rigour of governance and risk management structures is noted, the ratings are also constrained by Cytonn’s short track record and untested ability to execute multiple real estate projects at relatively competitive project LTVs, timeously roll over capital while achieving targeted returns, sustain the mezzanine-investor funding model and consistently secure funding at competitive rates/reasonable tenors.
Looking ahead, securing longer term funding, in particular a successful equity raise (as indicated) could support upward rating migration. Substantive upward rating movement in the medium term could also derive from Cytonn attaining profitability and positive cash flows through timely completion of large developments, translating to positive debt service and moderate gearing. Conversely, delays in project execution and unit uptake or unmitigated regulatory, construction and market risks impacting Cytonn High Yield Services and/or the group could lead to a default. An overly aggressive project rollout could also curtail liquidity and debt service.
|NATIONAL SCALE RATINGS HISTORY|
|Last/Initial rating (September 2017)|
|Long term: BB(KE); Short term: B(KE); Commercial paper: B(KE)|
|Primary Analyst||Committee Chairperson|
|Patricia Zvarayi||Eyal Shevel|
|Senior Analyst||Sector Head: Corporate Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Global Criteria for Rating Property Funds, updated February 2018
Global Master Criteria for Rating Funds and Asset Managers, updated March 2017
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|AIM||AIM is a sub-market of the London Stock Exchange, which allows smaller, less-viable companies to float shares with a more flexible regulatory system than is applicable to the main market.|
|Downgrade||The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|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.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|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.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Market Risk||Volatility in the value of a security/asset due to movements in share prices, interest rates, currencies, commodities or wider economic factors.|
|NSE||Nairobi Securities Exchange.|
|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 possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Tenor||The time from the value date until the expiry date of an instrument, typically a loan or option.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a detailed glossary of terms, please click here
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 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.
Cytonn Investments Management Plc 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 Cytonn Investments Management Plc.
The information received from Cytonn Investments Management Plc and other reliable third parties to accord the credit rating(s) included:
• the 2017 audited annual financial statements and two years’ comparatives;
• summary of the June 2018 management accounts;
• internal management reports and
• investor presentations
The ratings above were solicited by, or on behalf of, Cytonn Investments Management Plc, and therefore, GCR has been compensated for the provision of the ratings.
GCR downgrades Cytonn Investments Management Plc’s rating to B(KE), Outlook Evolving.