Announcements Corporate Rating Alerts

GCR Downgrades Dipula Income Fund Limited’s rating to BBB(ZA) due to the constrained funding environment; Outlook Stable.

Rating Action

Johannesburg, 1 April 2020 – GCR Ratings (“GCR”) has downgraded Dipula Income Fund Limited’s (“Dipula”) national scale long and short term Issuer ratings to BBB(ZA) and A3(ZA) respectively, from BBB+(ZA) and A2(ZA) previously. The Rating Outlook remains Stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Dipula Income Fund Limited Long Term Issuer National BBB(ZA) Stable
Short Term Issuer National A3(ZA)

Rating Rationale

The ratings downgrade reflects the Dipula’s constrained funding position, combined with the deterioration in the outlook for the South African property sector. Notwithstanding this, the ratings are supported by a continued stability in several property performance metrics despite the weaker operating environment.

Dipula’s funding remains stable albeit the key credit protection metrics are at the upper end of the band for similarly rated companies. In this regard, the gross LTV ratio registered at 39.9% at FY19, in line with the level over the past three years. Net debt to EBITDA improved to 425% (FY18: 475%), as previous acquisitions contributed for a full period. Similarly, interest cover remained stable at 3.1x.

Nevertheless, within the current environment, where property valuations are under pressure, GCR expects gearing ratios to deteriorate. Moreover, mid-cap REIT’s are likely to find it increasingly difficult to reduce leverage. Equity valuations have fallen sharply in recent months, with Dipula’s market value now reflecting a more than 70% discount to reported net asset value, implying significant dilution for existing shareholders in a capital raise, which would likely preclude this option. An equity raise would also be complicated by Dipula’s dual share structure. Moreover, while there are a number of properties that have been earmarked for sale, the property market remains very weak and asset sales have taken longer than expected to materialise, and at lower prices.

Positively, Dipula continues to demonstrate good funding relationships with long standing bankers. Accordingly, the REIT was able to refinance around R700m in maturing facilities in 1H FY20, of which R270m was extended for four years and R300m for two years. Nevertheless, liquidity coverage is expected to be constrained below 1x due to Dipula’s limited facility headroom. Covenant headroom is also low, and is expected to remain restricted over the rating horizon.

Dipula’s credit risk profile is also somewhat constrained by the fairly small size of its property portfolio (R8.8bn in properties at FY19), as well as its geographic concentration to South Africa. Nevertheless, within the domestic environment, the REIT evidences a fairly diverse portfolio. Asset concentration to retail is positively considered, with Dipula mitigating sector risk with exposure to office, industrial and going forward residential assets. Coupled with internal efficiencies, this has allowed Dipula to report improving performance metrics, with the vacancy rate declining to 6% on FY19, whilst maintaining strong average escalations on new and renewed leases. However, GCR expects rental income to come under pressure, due to current disruptions due to the COVID-19 crisis and a deteriorating operating climate.

Outlook Statement

The Stable Outlook reflects GCR’s expectation that earnings will continue to report relatively sound performance metrics.

Rating Triggers

Negative rating movement could arise if there is an increase in the LTV ratio, which results in further restrictions in covenant headroom. A deterioration in performance metrics could also result in GCR lowering the ratings, whether due to internal factors or if the operating environment weakens further. Positive rating action is unlikely until the operating environment improves. However, a meaningful reduction in debt an improved liquidity coverage ratio would be positively considered.

Analytical Contacts

Primary analyst Eyal Shevel Sector Head: Corporate Ratings
Johannesburg, ZA Shevel@GCRratings.com +27 11 784 1771
Committee chair Patricia Zvarayi Deputy Sector Head: Corporate Ratings
Johannesburg, ZA Patricia@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
GCR Rating Scales, Symbols and Definitions, May 2019
GCR’s Country Risk Score report, January 2020
GCR’s SA Sector Risk Score report, 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

Dipula Income Fund Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Long term Issuer Initial National BBBZA) Stable Outlook September 2014
Short Term Issuer Initial National A3(ZA)
Long term Issuer Last National BBB+(ZA) Stable Outlook September 2019
Short Term Issuer Last National A2(ZA)

Risk Score Summary

Risk score Dipula Income Fund Limited
Operating environment 14.00
Country risk score 7.50
Sector risk score 6.50
Business profile (1.00)
Portfolio quality (1.00)
Management and governance 0.00
Financial profile (2.00)
Leverage and Capital Structure (1.00)
Liquidity (1.00)
Comparative profile 0.00
Group Support 0.00
Peer analysis 0.00
Total Risk Score 11.00

Glossary

Asset A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Bond A long-term debt instrument issued by either a company, institution or the government to raise funds.
Capital The sum of money that is invested to generate proceeds.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Concentrations A high degree of positive correlation between factors or excessive exposure to a single factor that share similar demographics or financial instrument or specific sector or specific industry or specific markets.
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.
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
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 The party indebted or the person making repayments for its borrowings.
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.
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.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
REIT Real Estate Investment Trust. A company that owns, operates or finances income-producing real estate.
Rent Payment from a lessee to the lessor for the temporary use of an asset.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Weighted Average An average resulting from the multiplication of each component by a factor reflecting its importance or, relative size to a pool of assets or liabilities.

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 Dipula Income 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.

Dipula Income Fund Limited 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 information received from Dipula Income 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);
  • Investor presentations, SENS announcements and roadshows;
  • a breakdown of debt facilities available and related counterparties at – (including related debt covenants).


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