Johannesburg, 18th December 2020 – GCR Ratings (“GCR”) has downgraded TUHF Limited’s national scale long-term issuer rating to BBB-(ZA) from BBB(ZA). At the same time, GCR has affirmed the South African short term issuer rating of A3(ZA). The Rating Watch Negative has been maintained.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|TUHF Limited||Long Term issuer||National||BBB-(ZA)||Ratings Watch Negative|
|Short Term issuer||National||A3(ZA)|
In March 2020, TUHF was granted a six-month capital moratorium on its debt facilities by its creditors. GCR has opted not to recognise this moratorium as a default as a result of the arrangement being a proactive step that was taken because of COVID-19 and the resultant ’hard lock-down’, as well as the restructuring being viewed as a form of support from funders. Further we note that TUHF has breached covenants with some funders, but has received condonation.
TUHF operates exclusively in South Africa, and its operating environment score has been reduced to a total of 12.0 from 12.5. This as a result of the South African Country risk score being reduced to 7.0 from 7.5, due to the considerable economic stress facing the country and weakening fiscal position of the government.
The competitive position is a rating negative, balancing its good track record operating in South Africa’s otherwise neglected inner city property market, and historically adequate revenue stability; with a monoline business model, difficult to defend niche, and limited geographic diversification. We also take into account TUHF’s strong Environmental, Social and Governance (‘ESG’) characteristics and impact, which boosts competitive advantage and provides additional access to sources of funding.
With a GCR leverage ratio of 11.1% for FY20 (FY19: 12.4%), GCR considers TUHF’s capital position to be adequate. In FY20 TUHF experienced an earnings shock as a result of a material increase in the required credit loss provisioning, and GCR expects this pressure to persist over the next 18 – 24 months as result of the deteriorating operating environment. Positively, the earnings pressure and resultant capital erosion is expected to be countered by a R500 million capital raise which is planned for mid-2021. Revenues have historically been stable, but at moderate levels of earnings, with return on assets in the 1.2% – 1.6% range up to FY19.
Historically, TUHF has operated with low levels of credit losses (below 0.5%), low non-performing loans (“NPLs”) (below 3%) and a good level of reserve coverage (well above 80%). The entity’s risk position still compares well relative to the broader financial institutions sector (credit loss of c.1.9%), however asset quality has come under strain with FY20 credit losses and NPLs of 1.24% (FY19: 0.86) and 10.4% (FY19: 9.2%) respectively. This is expected to persist due to the economic impact of Covid-19. At the same time, very high loan book concentrations are an inherent part of the business with the loans to the top 5 clients at c.30% of total loans and more than 2x capital at FY20 (albeit to separate legal entities around that lenders group), leaving TUHF vulnerable to shocks from large single obligor defaults. Positively, TUHF held adequate levels of collateral going into the crisis. However, we expect an increase in loan-to-value figures as a result of expected diminishing of building’s cashflow expectations.
GCR views TUHF’s funding structure and liquidity to be a ratings weakness. TUHF is exclusively wholesale funded, with cost of funding high relative to peers and commercial banks. However, we do expect a material improvement in the funding structure and slight decrease in the cost of funding over the next 12 months. This as a result of the continuing efforts to diversify the currently concentrated, largely on balance sheet debt, which is short term in nature relative to TUHF’s asset maturity profile. The improvements in the funding structure are expected to be achieved through the increased use of securitisations which are off-balance sheet and provide a natural asset liability match, issuances in the domestic medium-term note programme and bilateral loans from banks and asset managers forming a materially reduced proportion of the funding structure. To date, funders have been supportive and expected to remain supportive, especially with TUHF’s very strong ESG credentials.
Nevertheless, we consider TUHF’s liquidity position to be currently weak, exacerbated by the stress from Covid-19. With the level of GCR liquid assets/ short-term wholesale funding coverage at below 0.1x at FY20, albeit expected to be somewhat remedied within the next 12 months, TUHF’s current reliance on access to the wholesale market for ongoing liquidity and the timeous repayment of principal and interest, is a ratings negative.
The Ratings Watch Negative reflects the short-term pressure on liquidity which was exacerbated by the impact of COVID-19 on collections, and the current dependence on short-term funding by the entity. While collections have since improved close to pre-COVID 19 levels, the pressure caused by the reliance on rolling over maturing short-term debt is improving but expected to still persist in the short-term. Albeit not anticipated in the short-term, positive movement in the ratings could result from improvements in the funding structure which simultaneously led to stable funds, better liquidity and increased profitability.
A downgrade may arise in the short-term should the entity fail to materially improve its funding structure and manage its liquidity risk in the medium term. Further, a downgrade could arise from the deterioration of asset quality, with the persistence in the loan book concentration. Lastly, unless leverage and / or earnings fail to improve in the next 12months, we could also lower the ratings. Due to the current balance of rating factors, we consider there to be limited upward ratings potential in the short-term. However, in the long term, proven stability in the funding and liquidity accompanied with cost of funding reductions, which results in stronger earnings, could result in positive ratings movement.
|Primary analyst||Thandolwenkosi Mkwanazi||Financial Institutions Associate|
|Johannesburg, ZA||ThandolwenkosiM@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Financial Institutions, May 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, November 2020|
|GCR Financial Institutions Sector Risk Score, August 2020|
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term issuer||Initial||National||BBB-(ZA)||Stable||September 2013|
|Last||National||BBB(ZA)||Ratings Watch Negative||July 2020|
|Short Term issuer||Initial||National||A3(ZA)||—||September 2013|
Risk Score Summary
|Rating components and factors||Risk scores|
|Country risk score||7.00|
|Sector risk score||5.00|
|Management and governance||0.00|
|Capital and leverage||0.50|
|Funding structure and liquidity||(2.00)|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|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.|
|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.|
Salient Points of Accorded Ratings
GCR affirms that a.) no part of the ratings were 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.
Subsequent to an appeal by the rated entity, the national scale long term and short term issuer ratings were revised as reflected in the announcement. The credit ratings have been disclosed to TUHF 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.
TUHF Limited participated in the rating process via face-to-face meetings, telephonic communications, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from TUHF Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results of TUHF Holdings Limited as at 31 March 2020;
- Audited financial results of TUHF Limited as at 31 March 2020;
- Audited financial results of TUHF Urban Finance (RF) Limited as at 31 March 2020;
- Loan book analysis information as at September 2020;
- Subordinated Shareholder Facility Agreement;
- Treasury and Risk Report – Funding Summary September 2020;
- TUHF Group budget 2021;
- CEO’s report 25 March 2020;
- Environmental, Social and Governance Quarterly Report June 2019.