Announcements Corporate Rating Alerts

GCR revises the Outlook on Emira’s ratings to Negative on elevated industry risk; assigns AA+(ZA)(EL) rating to new Notes

Rating Action

Johannesburg, 3 September 2020 – GCR Ratings (“GCR”) has affirmed the national scale long and short-term issuer ratings assigned to Emira Property Fund Limited (“Emira”, “the REIT” or “the fund”) of A(ZA) and A1(ZA), respectively. Concurrently, GCR has affirmed the long-term issue ratings of AA+(ZA)(EL) assigned to the existing Senior Secured Notes, and also assigned a rating of AA+(ZA)(EL) to the EPF021 Notes issued by Emira. Following the full settlement of EPF007 Notes upon maturity, the related ratings have been withdrawn. The Outlook on Emira’s ratings has been revised to Negative, from Stable previously, reflecting GCR’s view that the recessionary domestic climate will continue to drive elevated funding and asset risk in the South African commercial real estate sector over the outlook period.

Rated Entity / Issue

Rating class

Rating scale

Rating*

Outlook / Watch

Emira Property Fund Limited

Long Term Issuer

National

A(ZA)

Negative Outlook

Short Term Issuer

National

A1(ZA)

Senior Secured EPF007 Notes

Long Term Issue

National

WD

Senior Secured EPF016 Notes

Long Term Issue

National

AA+(ZA)(EL)

Negative Outlook

Senior Secured EPF017 Notes

Long Term Issue

National

AA+(ZA)(EL)

Negative Outlook

Senior Secured EPF018 Notes

Long Term Issue

National

AA+(ZA)(EL)

Negative Outlook

Senior Secured EPF021 Notes

Long Term Issue

National

AA+(ZA)(EL)

Negative Outlook

*The Senior Secured Note 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, these ratings carry an “(EL)” suffix. The expected loss ratings assigned to the notes issued therefore differs from the ‘BBB(ZA)’ long-term senior unsecured credit rating of the Issuer.

Rating Rationale

The Negative Outlook on Emira’s ratings reflects sustained pressure on the property sector’s cash flows and funding, due to COVID-19-related disruptions, translating into a reduction in property values and an LTV ratio above 40%.

Driven by an R800m write down of the portfolio and higher derivative debt exposure, Emira’s LTV increased to 43% (FY19: 36%) at FY20. Nevertheless, the fund’s interest cover ratio of 3.0x (FY19: 2.9x) remained aligned to the issuer ratings. Sustained access to capital enabled Emira to refinance R1.8bn in debt at improved rates, and translated to a relatively smoother debt maturity profile, albeit the weighted average term registered at 2.1 years. GCR’s assessment of liquidity remains supportive of a coverage ratio of at least 1.0x over the coming 12 months.

Along with the industry, Emira’s operating performance was impacted by the COVID-19 disruptions, through a combination of rental deferred and foregone, as well as a significant increase in provisions. Nevertheless, the decline in rental income was moderated by good tenant retention and sound escalations. Similarly, there was only a small deterioration in the vacancy rate to 4.1% (FY19: 3.6%). Exposure to the US moderated the disruption in earnings, as businesses had less stringent restrictions and reopened earlier in comparison to South Africa.

The ratings on the Senior Secured Notes are determined based on the assumption that the maximum possible amount of debt is drawn down to the covenant LTV of 40%. The independent property values were stressed in accordance with GCR’s Criteria for Rating Secured Bonds and the recovery rate of 97% qualifies as ‘Excellent Recovery Prospects’. Although GCR notes the additional pressure on property values across the commercial property sector, comfort was

taken from the recoveries estimated with an additional stress on the recovered property value. As such, GCR maintained two international scale notches, and a four notch uplift on the national scale respectively, reflecting the relative defensiveness of the estimated recovery rate. Accordingly, the existing notes’ ratings were affirmed at AA+(ZA)(EL), while the new EPF021 Notes were also assigned a rating of AA+(ZA)(EL). The notes also carry the revised rating outlook of Negative assigned to the issuer ratings.

Outlook Statement

The Negative Outlook reflects GCR’s view that funding pressure is likely to remain elevated across the domestic REIT sector beyond the disruptions caused by COVID-19. Covenant and other treasury risks are also expected to continue to be stoked by the potential for further downward pressure on property values.

Rating Triggers

Negative action could be taken due to 1) further deterioration in the operating environment, 2) additional property write-downs, sustained earnings risk, or adverse currency movements further weakening leverage metrics and 3) a deterioration in Emira’s 12 months’ liquidity coverage ratio below 1.0x. A downgrade of the issuer ratings would also translate to a downgrade of the ‘EL’ ratings. Positive rating action is unlikely in the current operating environment, albeit defensiveness of Emira’s portfolio sustained beyond the vagaries of the COVID-19 crisis, and moderation of the LTV ratio towards 35% beyond the outlook period would bode positively.

Analytical Contacts

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, May 2020

GCR’s Property Sector Risk Score report, August 2020

GCR places South African commercial property on Negative Trend, August 2020

Credit Spotlight: Issuer Credit Ratings, Issue Credit Ratings and Expected Loss Ratings, June 2020

Ratings History

Emira Property Fund Limited

Rating class

Review

Rating scale

Rating

Outlook/Watch

Date

Long term Issuer

Initial

National

A-(ZA)

Positive Outlook

May 2011

Short Term Issuer

Initial

National

A1(ZA)

Long term Issuer

Last

National

A(ZA)

Stable Outlook

Apr 2020

Short Term Issuer

Last

National

A1(ZA)

Stock Code

Review

Rating scale

Rating*

Outlook/Watch

Date

EPF016

Initial

National

AA(ZA)

Stable

Sep 2018

Last

National

AA+(ZA)(EL)

Stable

Apr 2020

EPF017

Initial

National

AA(ZA)

Stable

Sep 2018

Last

National

AA+(ZA)(EL)

Stable

Apr 2020

EPF018

Initial

National

AA(ZA)

Stable

Oct 2019

Last

National

AA+(ZA)(EL)

Stable

Apr 2020

EPF021

Initial

National

AA+(ZA)(EL)

Negative

Sep 2020

Last

National

AA+(ZA)(EL)

Negative

Sep 2020

* 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 long-term issuer 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

Rating Components and Factors

Risk scores

 

 

Operating environment

13.00

Country risk score

7.00

Sector risk score

6.00

   

Business profile

1.00

Portfolio quality

1.00

Management and governance

0.00

   

Financial profile

(1.00)

Leverage and Capital Structure

(0.50)

Liquidity

(0.50)

   

Comparative profile

0.00

Group support

0.00

Peer analysis

0.00

   

Total Score

13.00

Glossary

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 Risk

The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.

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.

DMTN

Domestic Medium-Term Note.

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

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. 

Loan To Value

Principal balance of a loan divided by the value of the property that it funds. LTVs can be computed as the loan balance to most recent property market value, or relative to the original property market value.

Loan

A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond.

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.

Rating Horizon

The rating outlook period

Rating Outlook

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.

Short Term Rating

See GCR Rating Scales, Symbols and Definitions.

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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

The credit ratings have been disclosed to Emira 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.

Emira Property Fund Limited participated in the rating process via face-to-face management meetings, tele-conferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Emira Property Fund Limited and other reliable third parties to accord the credit ratings included:

  • the 2020 audited annual financial statements (plus four years of audited comparative numbers);
  • presentations, SENS announcements and roadshows;
  • breakdown of the secured property portfolio at 31 July 2020;
  • latest property valuation reports;
  • the final signed Applicable Pricing Supplement for the EPF021 Note;
  • final signed legal opinion in respect of the issuance of the new note;
  • covenant compliance certificate for the March 2020 measurement date.
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