Johannesburg, 25 October 2019 – GCR Ratings (“GCR”) has downgraded the national scale long term Issuer rating accorded to TPS Eastern Africa Plc to BBB+(KE), from A-(KE), and affirmed the short term Issuer rating at A2(KE). The Outlook has been affirmed at Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|TPS Eastern Africa Plc||Long term Issuer||National||BBB+(KE)||Stable Outlook|
|Short term issuer||National||A2(KE)||—|
On May 22, 2019 GCR announced that it had released a new rating framework and sectoral criteria. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the TPS Eastern Africa Plc. rating review under the new Criteria for Rating Corporate Entities. As a result, the ratings have been removed from ‘Under Criteria Observation’ and the rating revised in line with the new methodology.
The rating downgrade on TPS Eastern Africa Plc (“TPSEA”, “the group”) reflects the high current gearing levels, due to the debt assumed for the upgrade of key hotels, and the cash flow constraints resulting from delayed completion. However, as the refurbishment of the Nairobi Serena Hotel (“NSH”) has now been completed, GCR expects earnings to rise substantially from FY19, with a corresponding significant improvement in gearing metrics.
Gross debt rose from KES2.6bn at FY15 to KES4.7bn at FY18. While it was expected that earnings would decrease during the NSH upgrade, the delays added to the cash flow pressures. As a result, key credit protection metrics deteriorated substantially. Net debt to EBITDA spiked to a review period high of 5.7x at FY18 (FY17: 4.6x), above the initial stipulated 4.5x covenant. Although interest coverage rose to 6.7x (FY17: 6.0x), including interest capitalised, coverage would have been between 3x-3.5x. In anticipation of the weak metrics, TPSEA requested and secured waivers for a breach of certain facility covenants, and extended the principal payment moratorium on the PROPARCO loan until June 2020.
Mitigating the credit impact of weak credit protection metrics somewhat is the favourable capital structure. In this regard, all debt is amortising with no lumpy refinancing maturities, while the bulk of debt is provided by the supportive nature of facility providers. PROPARCO loans, which account for around 55% of debt funding, are provided on favourable terms, while a further 19% of loans are interest free and provided by Aga Khan Fund for Economic Development (“AKFED”). Moreover, with the completion of NSH and other projects, gearing metrics are expected to improve substantially, with GCR’s expectation that net debt to EBITDA should register around 3.5x in FY19, and even stronger thereafter, with interest coverage of around 5x.
Based on projected cash flows, TPSEA’s liquidity coverage over 12 months equates to around 1.5x for FY19 and FY20. Uses of cash are notably reduced as there are no major capex plans, and debt servicing will include the amortisation payments. However, GCR notes that there are no undrawn facilities to ensure debt servicing payments are made, which does add to liquidity risk.
Counterbalancing the current weak financial profile, GCR’s ratings recognise TPSEA’s solid market position in East Africa, where the Serena brand enjoys strong recognition as a provider of high quality accommodation for both the business and leisure traveller. In this regard, Serena operates leading hotels in key cities in the region (including Nairobi, Kampala, Kigali and Dar es Salaam) complemented by safari lodges in Kenya and Tanzania, which provide some geographic and product diversification. Notwithstanding this, the sector risk score is somewhat limited by the inherent volatility in the hospitality industry, albeit that government initiatives to bolster the industry within the East African region are positively considered and expected to result in continued tourism growth.
The Stable Outlook reflects GCR’s expectations that TPSEA will reports significant earnings improvement and much stronger margins from FY19. This should result in a decrease in net debt to EBITDA to around 3.5x and growth in interest coverage to around 5x.
Negative rating action is likely if TPSEA underperforms relative to expectations, whether due to internal or exogenous factors, as any underperformance would see gearing metrics remain weak. Further challenges in meeting debt service obligations would also result in a downgrade. Positive rating action is dependent on strong earnings growth over the medium term, and the return to sustainably lower gearing metrics.
|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 Corporate Companies, May 2019|
|GCR Rating Scales, Symbols and Definitions, May 2019|
|GCR Country Risk Scores, June 2019|
|GCR Kenyan Corporate Sector Risk Scores, September 2019|
TPS Eastern Africa Plc
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial||National||A-(KE)||Stable||June 2009|
|Issuer Short Term||Initial||National||A2(KE)||–||June 2009|
Risk Score Summary
|Country risk score||4.25|
|Sector risk score||4.00|
|Management and governance||0.00|
|Leverage and capital structure||-1.50|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|Debt Service Ratio||A measure of a company’s ability to service its interest and principal redemption costs, expressed as the ratio of earnings or cash flows over a period to the sum of interest and principal payments over the same timeframe.|
|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.|
|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.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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 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; 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 rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The credit ratings have been disclosed TPS Eastern Africa Plc, and were amended following an appeal. The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
TPS Eastern Africa 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 information received from TPS Eastern Africa Plc and other reliable third parties to accord the credit rating included:
- Audited financial results for Dec 2018
- Four years of comparative audited numbers
- Full details of funding facilities
- Budgeted cash flows for 2019