Announcements Corporate Rating Alerts

GCR lowers Delta Property Fund Limited’s rating to B+(ZA) on high gearing and liquidity weaknesses, Rating Watch Evolving

Rating Action                                                

Johannesburg, 10 July 2019 – GCR Ratings (“GCR”) has downgraded the Long and Short term national scale Issuer ratings assigned to Delta Property Fund Limited to B+(ZA) and B(ZA); and placed the ratings on Rating Watch Evolving.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Delta Property Fund Limited Issuer Long Term National B+(ZA) Rating Watch Evolving
  Issuer Short Term National B(ZA)

Rating Rationale

The rating downgrade on Delta Property Fund Limited (“Delta”, “the REIT”) reflects the continued deterioration in credit metrics and severe liquidity weakness in view of the large debt maturities coming due in the next few months, counterbalanced by continued notable support by banking partners. 

The persistent delays in renewing Department of Public Works (“DPW”) bulk leases continues to curtail the fund’s weighted average lease expiry, which in turn has placed notable pressure on the REIT’s ability to term out maturing debt with longer tenors. At FY19, Delta reported an average debt expiry profile of 0.8 years (1H FY19: 1.3 years), with R3.9bn (73%) of debt expiring in the next six months. As such, liquidity risk is of concern, exacerbated by the REIT’s significant funding counterparty concentration, lack of undrawn facilities and a fully encumbered asset pool.

At the same time, the LTV ratio has further ticked up to 45% at FY19 (1H FY19: 43%), following new debt drawdowns and pressure on property valuations (exacerbated by the lease profile). GCR is of the view that due to the limited covenant headroom, Delta has become increasingly susceptible to potential breaches, particularly arising from sustained high funding costs and constrained income progression. Delta’s rentals have come under pressure on the back of rising vacancies and negative reversions on lease renewals.

Nevertheless, in GCR’s opinion, the material support provide by the funding partners to date is expected to continue going forward, which partly alleviates the REIT’s high liquidity risks in the event that Delta is unable to extend its debt maturity schedule.

GCR does also note management’s efforts on concluding lease renewals to date and commitment to temper elevated vacancies, whilst finalizing the DWP bulk leases as soon as possible. Statements made recently suggest that the latter could be imminent and could see the fund secure lease tenors of up to five years. This could support the ratings if it has a meaningful impact on lengthening the debt profile with its banking counterparties and alleviating refinancing pressures. In addition, material asset sales (including R1.4bn in non-core property and the investment in a listed equity stake) could increase gearing headroom but have not yet materialised, whilst execution risk considered high in terms of concluding these on a timely basis.

Outlook Statement

The Evolving Rating Watch reflects GCR’s view that there are both positive and negative trends that could affect the ratings. The ratings could benefit if the impending lease renewals lead to a lengthening in both the lease and debt profiles, and refinancing and covenant risk is materially reduced. On the other hand, failure to address the liquidity weaknesses or reduced funder support would put further pressure on the ratings.

Rating Triggers

For the ratings to be upgraded, Delta would need to lengthen its lease and debt profile, whilst reducing liquidity risk. Reduced funder support, higher liquidity risks and/or increasing vacancy rates could bring down the ratings. 

Analytical Contacts

Primary analyst Sheri Morgan Senior Credit Analyst
Johannesburg, ZA Morgan@GCRratings.com +27 11 784 1771
     
Committee chair Matthew Pirnie <matthewp@gcrratings.com> Sector Head: Financial Institutions
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Real Investment Trusts and Other Commercial Property Companies, May 2019
GCR Country Risk Scores, June 2019
GCR South Africa Corporate Sector Risk Scores, June 2019
Delta Property Fund Limited Credit Rating reports, 2011-18

Ratings History

Delta Property Fund Limited

Rating class Review Rating scale Rating class Outlook Date
Issuer Long Term Initial National BBB+(ZA) Stable July 2013
  Last National BBB-(ZA) Evolving November 2018
Issuer Short Term Initial National A2(ZA) July 2013
  Last National A3(ZA) November 2018

RISK SCORE SUMMARY

Risk score 8.00
   
Operating environment 14.50
Country risk score 7.50
Sector risk score 7.00
   
Business profile -2.00
Portfolio composition -1.00
Portfolio performance -1.00
Management and governance 0.00
   
Financial profile 4.50
Leverage and capital structure -2.00
Liquidity -2.50
   
Comparative profile 0.00
Group support 0.00
Peer analysis 0.00

Glossary

Asset A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Capital The sum of money that is invested to generate proceeds.
Country Risk The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.
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.
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.
Credit A contractual agreement in which a borrower receives something of value now, and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company
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.
Drawdown When a company utilises facilities availed by a financial institution or an international lender there is said to be a drawdown of funds.
Environment The surroundings or conditions in which an entity operates (Economic, Financial, Natural).
Equity Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
Execution Risk The risk that a company’s business plans will not be successful when they are put into action.
Financial Institution An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.
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.
Income Money received, especially on a regular basis, for work or through investments.
Issuer Ratings See GCR Rating Scales, Symbols and Definitions.
Issuer The party indebted or the person making repayments for its borrowings.
Lease Conveyance of land, buildings, equipment or other assets from one person (lessor) to another (lessee) for a specific period of time for monetary or other consideration, usually in the form of rent.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
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.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Pool An organisation of insurers or reinsurers through which particular types of risk are underwritten and premiums, losses and expenses are shared in agreed-upon amounts.
Portfolio A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.
Property Movable or immovable asset.
Rating Watch See GCR Rating Scales, Symbols and Definitions.
Refinancing 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.
Renewal The re-establishment of the in-force status of a policy, the term of which has expired or will expire unless it is renewed.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Senior A security that has a higher repayment priority than junior securities.
Short Term Current; ordinarily less than one year.
Short Term Rating See GCR Rating Scales, Symbols and Definitions.
Tenor The time from the value date until the expiry date of an instrument, typically a loan or option.
Trust A third party that acts in the best interest of another party, according to the trust deed, usually the investors. Owner of a securitisation vehicle that acts in the best interest of the Noteholders.
Upgrade The rating has been raised on its specific scale.
Vacancy In commercial property, usually expressed as a percentage of unoccupied floor space in relation to the GLA.
Valuation An assessment of the property value, with the value being compared to similar properties in the area.
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.
Weighted The weight that a single obligation has in relation to the aggregated pool of obligations. For example, a single mortgage principal balance divided by the aggregated mortgage pool principal balance.

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 ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

The credit rating has been disclosed to Delta Property Fund Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.

Delta Property Fund Limited 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 Delta Property Fund Limited and other reliable third parties to accord the credit rating included:

  • The audited financial results for February 2019
  • Four years of comparative audited numbers
  • Industry presentation for FY19
  • Detailed facility breakdown and maturity schedule for FY19


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