Announcements Corporate Rating Alerts

GCR downgrades SA Corporate’s rating to A-(ZA) on deteriorating financial profile. Ratings withdrawn.

Rating Action

Johannesburg, 22 May 2020 – GCR Ratings (“GCR”) has downgraded the national scale long-term and short-term Issuer ratings assigned to SA Corporate Real Estate Limited (“SA Corporate” or “the REIT”) to A-(ZA) and A2(ZA), respectively, with a Negative Outlook. Subsequent to the above rating action, the ratings have been withdrawn for commercial reasons. GCR will no longer provide analytical coverage on the REIT.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
SA Corporate Real Estate Limited Long Term Issuer National A-(ZA)/WD Negative Outlook/WD
Short Term Issuer National A2(ZA)/WD

Rating Rationale

The ratings downgrade is premised on the operating and financial pressure facing SA Corporate on the back of elevated asset risks facing the South African property sector.

SA Corporate’s operating performance has been impacted by rising vacancies and administrative costs, which has seen operating profit decline. This comes at a time when debt has increased, with the net LTV ratio nearing the 40% level and net debt to operating income rising above 5x. Although the terming out of R878m in debt well in advance was positively viewed, the new maturity dates in March 2021 meant that this debt is still considered in GCR’s liquidity coverage calculation, as the term to maturity remains less than 12 months. This could become a liquidity issue if key funders withdraw support for the REIT, given the significant uncertainties that the COVID-19 pandemic has introduced to the already challenging operating climate.

Outlook Statement

At the time of the withdrawal, the Negative Outlook reflects the weakening in key performance and leverage metrics amidst significant uncertainties in the property sector.

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
GCR’s Country Risk Score report, published May 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

SA Corporate Real Estate Limited

Rating class Review Rating scale Rating Outlook/Watch Date
Long term Issuer Initial National A-(ZA) Positive Outlook Jul 2013
Short Term Issuer Initial National A1-(ZA)
Long term Issuer Last National A(ZA) Negative Outlook Oct 2019
Short Term Issuer Last National A1(ZA)

RISK SCORE SUMMARY

Risk scores
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 (1.50)
Leverage and Capital Structure (0.50
Liquidity (1.00)
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00
Total Score 13.00

Glossary

Advance A lending term, to transfer funds from the creditor to the debtor.
Asset A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Contract An agreement by which an insurer agrees, for a consideration, to provide benefits, reimburse losses or provide services for an insured. A ‘policy’ is the written statement of the terms of the contract.
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.
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.
Downgrade The rating has been lowered on its specific scale.
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 shareholders’ funds or by EBITDA.
Issuer Ratings See GCR Rating Scales, Symbols and Definitions.
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.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Obligation The title given to the legal relationship that exists between parties to an agreement when they acquire personal rights against each other for entitlement to perform.
Proceeds Funds from issuance of debt securities or sale of assets.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Real Estate Property that consists of land and / or buildings.
Refinance 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 Current; ordinarily less than one year.

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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to SA Corporate Real Estate 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.

SA Corporate Real Estate Limited did not participate in the rating process, although GCR considered the publicly available information on the entity sufficient for the purposes of reviewing the ratings. The information used to accord the credit ratings included:

  • the 2019 audited annual financial statements (plus four years of audited comparative numbers);
  • results presentations and SENS announcements.
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