Johannesburg, 27 March 2020 – GCR Ratings (“GCR”) has affirmed Hospitality Property Fund Limited’s (“HPF” or “the REIT”) national scale long-term and short-term issuer ratings of A-(ZA) and A2(ZA) respectively. The ratings have been placed on Rating Watch Negative. Concurrently, the ratings assigned to the Senior Secured Notes issued by HPF have been affirmed at AA(ZA)(EL), also on Rating Watch Negative.
The Rating Watch Negative reflects the projected loss of earnings for hotel operators as a result of the COVID-19 pandemic. Nevertheless, HPF’s ratings are underpinned by conservative gearing metrics, evidenced by its reported LTV of 19% at September 2019.
GCR considers the hospitality sector among those that will be highly impacted by the pandemic, with substantial losses in volumes anticipated to cause severe strain on earnings and financial stability. Hotel room demand has already taken a severe knock as restrictions on global travel continue to be imposed and forward bookings for the period up to June 2020 are cancelled or postponed. Accordingly, almost all of HPF’s hotels are being closed down in order reduce costs. Moreover, GCR’s outlook for the general property sector was already impacted by pressure on property valuations and constrained access to funding prior to the COVID-19 shutdown.
Notwithstanding the above, HPF is expected to report satisfactory results for the year to 31 March 2020 and to meet all its debt covenants. However, the impact of the closure of hotels and depressed demand for rooms will put pressure on the fund’s earnings into FY21. To this end, the REIT is implementing a number of measures to ensure that it has sufficient liquidity available to weather the downturn. HPF has already started engaging with its funders over the potential breach of covenants at the September 2020 measurement period, with the request that the covenants be waived. GCR will continue to monitor developments as they unfold and may take further action should events warrant.
The Senior Secured Notes’ ratings are derived by applying a notching-up approach, starting from the long term issuer credit rating. The number of notches granted depends on the recovery prospects in the event of default and enforcement in a fire-sale scenario, as modelled by GCR, assuming that secured debt is in issue at the maximum covenant LTV of 45%. The modelled expected recovery rate at the last review date in December 2019 was maintained, at 91.9%, qualifying as ‘Excellent’ recovery prospects. GCR therefore maintained its four-notch uplift from the issuer’s rating, with the outlook on the Senior Secured Notes rating reflecting the outlook on the issuer rating. The HPF06 Notes’ rating was withdrawn upon the full redemption of the Notes at maturity in February 2020.
GCR could take Negative rating action if 1) the COVID-19 disruptions extend to longer than 12 weeks; 2) if the decrease in revenues result in expectations for sustained weaker credit protection metrics; 3) If there is a material deterioration in liquidity. Upward rating migration is considered unlikely in the current uncertain environment.
|Primary analyst||Tinashe Mujuru||Credit Analyst|
|Johannesburg, ZA||TinasheM@GCRratings.com||+27 11 784 1771|
|Committee chair||Eyal Shevel||Sector head: Corporate Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Real Estate Investment Trusts and Other Commercial Property Companies, May 2019|
|Criteria for Rating Secured Bonds, November 2018|
|GCR’s Country Risk Score report, published January 2020|
|GCR’s SA Sector Risk Score report, published March 2020|
|Pressure on valuations, soft equity prices signal weakening REIT financial profiles, March 2020|
|GCR Special Report – Corporate Performance in Infected by COVID-19, March 2020|
|Hospitality Property Fund Limited Secured Bond Rating Announcement, December 2019|
Hospitality Property Fund Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long term Issuer||Initial||National||BBB-(ZA)||Stable Outlook||Nov 2012|
|Short Term Issuer||Initial||National||A3(ZA)|
|Long term Issuer||Last||National||A-(ZA)||Stable Outlook||Sep 2019|
|Short Term Issuer||Last||National||A2(ZA)|
|Stock Code||Review||Rating scale||Rating*||Outlook/Watch||Date|
|HPF11||Initial||National||AA-(ZA)||Stable Outlook||Feb 2018|
|HPF12||Initial||National||AA(ZA)||Stable Outlook||April 2019|
|HPF13||Initial||National||AA(ZA)(EL)||Stable Outlook||Dec 2019|
* Structured bond ratings are based on an estimate of the expected loss in the event of an issuer default and are a function of the estimated probability of default of the issuer and the potential losses that may be incurred. As such, the ratings carry an ‘EL’ suffix. The ratings are derived by applying a notching approach, starting from the issuer long term rating. Should the issuer rating or the estimated recovery rate calculated by GCR change, the ratings assigned to the Senior Secured Notes may also change. Prior to the publication of GCR’s Rating Scales, Symbols and Definitions in May 2019, structured bond ratings did not carry the ‘EL’ suffix.
Risk Score Summary
|Risk scores||Hospitality Property Fund Limited|
|Country risk score||7.50|
|Sector risk score||6.50|
|Management and governance||0.00|
|Leverage and Capital Structure||1.50|
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Bond||A long-term debt instrument issued by either a company, institution or the government to raise funds.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Concentrations||A high degree of positive correlation between factors or excessive exposure to a single factor that share similar demographics or financial instrument or specific sector or specific industry or specific markets.|
|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.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks|
|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.|
|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.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|REIT||Real Estate Investment Trust. A company that owns, operates or finances income-producing real estate.|
|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.|
|Rent||Payment from a lessee to the lessor for the temporary use of an asset.|
|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 ratings 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 ratings have been disclosed to Hospitality Property Fund 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.
Hospitality 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 Hospitality Property Fund Limited and other reliable third parties to accord the credit ratings included:
- The 2019 audited annual financial statements (plus four years of audited comparative numbers);
- Results presentations;
- A breakdown of debt facilities available and related counterparties at 31 July 2019;
- Projections of income and capex for FY20
- Unaudited results for the six months ended September 2019;
- Joint voluntary statement on SENS
- Covenant compliance certificates;
- Occupancy and rental income data;
- Secured debt schedule.