Johannesburg, 11 Febraury 2014 — Global Credit Ratings has today downgraded Tower Funding Plc’s Medium Term Note Programme Series 1 Tranche A Bonds national scale issue rating to BB-(NG)(SF), while the Series 1 Tranche B Bond national scale issue rating has been maintained at A+(NG)(SF). Both ratings have been placed on “Rating Watch” and are valid until 08/2014.
Global Credit Ratings has accorded the above credit rating(s) to Tower Funding Plc’s Medium Term Note Programme based on the following key criteria:
The Issuer is a funding vehicle owned by the Tower Companies. As the Tower Companies do not comprise a legally consolidated unit (albeit that all companies are jointly and severally liable for bonds), GCR has analysed historical performance for the companies independently and constructed theoretical consolidated financial statements.
While the Tower Companies enjoy dominant domestic market shares in most of their product lines, with strong brand awareness and a substantial manufacturing infrastructure, operations have been exposed to severe competition from cheaper Chinese imports, significantly eroding the Group’s pricing power. In addition, high production costs, uncompetitive import tariffs, increased fuel costs, security challenges and flooding in some parts of the country adversely impacted earnings in 2012 and for 3Q F13. Operating profit has again been insufficient to cover the interest charge, with net interest coverage remaining below 1x since F08. Coupled with weaker earnings, the substantial interest burden has resulted in net losses since F11, with a substantial N2.5bn NLBT in F12 and a NLBT of N1.4bn for 3Q F13.
Large working capital requirements and capex have seen gross debt rise significantly. The extremely high debt levels within the Tower Companies remains a very serious concern and constraint on the ratings. Net gearing deteriorated substantially to 2,535% at 3Q F13 (FYE12: 1,102%) due to significant debt and recurring losses. Earnings based gearing improved as at 3Q F13 due to the firmer earnings, albeit remaining above 1,000%. The Tower companies’ gearing metrics remain well above acceptable levels for investment grade companies.
In view of anticipated positive developments in the Nigerian aluminium industry and the proposed equity injection into Tower Aluminium, the theoretical long term corporate rating was maintained at BB-(NG). Nevertheless, the rating was placed on Rating Watch, with GCR expected to conclude a rating review in August 2014, following the finalisation of the Tower Companies’ annual financial statements.
Both Bond Tranches benefit from a partial Guarantee provided by GuarantCo, albeit to differing extents. GCR is of the opinion that the credit quality of GuarantCo is commensurate with a ‘AAA(NG)’ long term Naira currency national scale rating. The rating of the Bonds is derived by applying a notching up approach, starting from the theoretical long term corporate credit rating of the Tower Companies.
N3.63bn Series 1 Tranche A Issue: Based on GCR’s revised secured bond methodology, the calculated overall recovery rate of 37.3% is much lower than the range in which an uplift can be accorded. As such the Series 1 Tranche A Issue has been downgraded to BB-(NG)(SF), corresponding with the theoretical corporate rating and has been placed on Rating Watch.
N1bn Series 1 Tranche B Issue: Given the mechanics of the guarantee, whereby 100% of the principal is guaranteed, recovery prospects of 83.6% are considered “Superior”. As per the criteria, the maximum number of rating notches is limited to 5 notches. However, based on the credit quality of the Guarantor and the mechanics of the guarantee, a higher rating uplift on the Naira currency national scale is deemed to be appropriate. As such, the Series 1 Tranche B Issue has been accorded an A+(NG)(SF) rating and has been placed on Rating Watch.
|NATIONAL SCALE RATINGS HISTORY|
|Series 1 Tranche A: A-(NG)(SF)|
|Series 1 Tranche B: AA-(NG)(SF)|
|Series 1 Tranche A: BB+(NG)(SF)|
|Series 1 Tranche B: A+(NG)(SF)|
|+23 41 462-2545|
|Sector Head: Corporates and Public Sector|
|+27 11 784 1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating 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.
Tower Funding 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 rating/s has been disclosed to Tower Funding Plc with no contestation of the rating.
The information received from Tower Funding Plc and other reliable third parties to accord the credit rating included the 2012 audited annual financial statements (plus four years of comparative numbers) for all the Tower Companies, consolidated full year budgeted financial statements for 2013, year to date management accounts for the 9 months to 30 September 2013, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.
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.