Announcements Corporate Rating Alerts

GCR Downgrades Transcorp Hotel Plc’s Ratings to BBB+(NG); Outlook Stable

Lagos, 15 January, 2021 – Global Credit Ratings has downgraded Transcorp Hotel Plc’s long-term national scale Issuer ratings to BBB+(NG) while maintaining the short-term Issuer ratings at A2(NG), with the outlook accorded as Stable. Concurrently, the Series 1 Bond rating has been downgraded to BBB+(NG). The ratings are valid until August 2021.

RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Transcorp Hotels Plc (”Transcorp” or “the Company”) based on the following key criteria:

The ratings downgrade reflects the weak sector risk assessment of the Nigerian hospitality industry, due to the severe impact of the pandemic on the sectorial performance. GCR expects the drawn-out impact of COVID-19 to persist into the near future with a resultant industry-wide suppression of occupancy levels and revenue per available room below pre-COVID levels. Nevertheless, GCR takes cognisance of Transcorp Hotel’s strong profile as a leading player within the upper scale niche of the Nigerian hospitality industry, with key strengths being parental/shareholders support, partnership with high-profile international players and strong operational track record.

Impacted by the global shock, revenue declined by an annualised 56% in 9M FY20 (after attaining an all-time high in FY19) and is expected to remain suppressed for the full year. GCR expects moderate rebound over the medium term, but the top line will likely remain below pre-pandemic levels. The Company has consistently demonstrated stronger earnings relative to available comparable local peers, albeit, with some variability through the cycle. While earnings margins have contracted sharply during 9M FY20, Transcorp is now implementing a number of cost rationalisation initiatives, which are expected to significantly bolster the margins over the medium term.

Debt funded hotel upgrade has resulted in elevated net debt to EBITDA since FY17, but this has spiked to a new high (>8,000%) during 9M FY20, owing to the unprecedented reduction in earnings. Transcorp intends to utilise the proceeds from its Rights Issue and concessional loan to refinance maturing obligations and attain a more favourable capital structure. Looking ahead, the earnings-based leverage should moderate to around 400%-450% at FY21, but this is contingent upon the Company achieving projected profit levels. The strong funding relationships across various sources is considered positive to the capital structure assessment.

EBITDA coverage of interest and discretionary cash flow coverage of debt have trended around the lower end of the intermediate range over the review period, primarily attributable to faster growth in debt ahead of earnings. Going forward, GCR expects some improvements in the credit protection metrics to around the intermediate band, on the back of lower debt/interest expense following scheduled repayments.

GCR also takes cognisance of the successful N10bn Rights Issue, and the Company’s plans to obtain another N20bn concessional facility, in order to refinance some imminent maturities and shore up liquidity. Accordingly, liquidity assessment is considered fairly strong with liquidity sources covering 1.7x of its uses over the next 12 months ending December 2021 and 1.1x in 18 months to June 2022.

Given that the Series 1 Bonds are senior unsecured obligations of the THP, the bonds bear the same rating as the Issuer and any change to THP’s rating will directly affect that of the bonds. The Series 2 Bonds have been fully redeemed on 4 December 2020.

A rating upgrade is unlikely in the near term, but GCR will positively consider substantial diversification of earnings base and more flexible but profitable business models. Conversely, the inability to ramp up profitability and improve debt service metrics, and/or further deterioration in gearing metrics could trigger a negative rating action.

NATIONAL SCALE RATINGS HISTORY

Rating class

Rating

Date

Outlook

Initial ratings

     

Long term

A-(NG)

Aug ‘15

Stable

Short term

A2(NG)

Aug ‘15

Stable

N10bn Bond

A-(NG)

Aug ‘15

Stable

N9.8bn Bond

A-(NG)

Aug ‘15

Stable

       

Last ratings

     

Long term

A-(NG)

Aug ‘19

Stable

Short term

A2(NG)

Aug ‘19

Stable

N10bn Bond

A-(NG)

Aug ‘19

Stable

N9.8bn Bond

A-(NG)

Aug ‘19

Stable

ANALYTICAL CONTACTS

Primary Analyst

Samuel Popoola

Lagos

+23 41 904 9462

samuel@gcrratings.com

 

Committee Chairperson

Dave King

Chairman

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2018

Glossary of Terms/Ratios (February 2018)

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.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.COM.NG/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.COM.NG.

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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity; d) the ratings are valid till August 2021.

Transcorp Hotel Plc participated in the rating process via 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 Transcorp Hotel Plc.

The information received from Transcorp Hotel Plc and other reliable third parties in according the credit rating included;

  • 2019 audited annual financial statements (plus four years of comparative numbers),
  • unaudited management accounts as at September 2020,
  • long term financial forecasts,
  • industry comparative data and regulatory framework,
  • a breakdown of facilities available and related counterparties.
  • 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.

 

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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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