Announcements Rating Alerts Structured Finance

GCR upgrades Vukile Property Fund Ltd Senior Secured Notes ratings to AAA(ZA)(EL), Outlook Stable.

Rating Action

Johannesburg, 15 August 2019 – GCR Ratings (“GCR”) upgraded the long-term credit ratings and maintained the outlooks accorded to the following Senior Secured Notes issued by Vukile Property Fund Ltd (“Vukile”, or the “Issuer”) under the Issuer’s R5bn Domestic Medium Term Note Programme (the “Programme”).

Security Class Stock Code Amount Rating class Rating scale Rating Outlook/Watch
Senior Secured Notes VKE07 R200,000,000 Issue Long Term National AAA(ZA)(EL) Stable
Senior Secured Notes VKE09 R378,000,000 Issue Long Term National AAA(ZA)(EL) Stable
Senior Secured Notes VKE10 R194,000,000 Issue Long Term National AAA(ZA)(EL) Stable

The Senior Secured Notes listed above are collectively referred to as the Group 1 Notes. Structured bond ratings provide 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.

Rating Rationale

The Issuer’s unsecured long-term corporate credit rating was upgraded to ‘AA-(ZA)’ from ‘A+(ZA)’ by GCR in July 2019. The upgrade was premised on the substantive growth in the Issuer’s Spanish portfolio, as well as sound portfolio management, evidenced by low vacancies and strong tenant retention, among other factors. However, the Senior Secured Notes’ ratings are primarily a function of estimated recoveries from the Group 1 property portfolio, which is made up of a portion of the Issuer’s South African portfolio that was ceded as security for the Group 1 Notes.

The Issuer provided GCR with updated independent property valuations that reflected an aggregate open market valuation (“OMV”) of R2.5bn for the Group 1 portfolio. In comparison to the property values utilised by GCR post the release of R1.8bn worth of properties from the secured portfolio in 2018, the Group 1 property portfolio’s aggregate OMV increased by an average 9.0%. GCR also received the March 2019 loan-to-value (“LTV”) covenant certificate, which confirmed compliance with the covenant and reported an LTV of 30.7% for the Group 1 portfolio.

The ratings of the Group 1 Notes are derived by applying a notching approach, starting from the long-term senior unsecured corporate credit rating of the Issuer. Based on the financial covenant (transactional Loan to Value) in place, the calculated overall recovery rate of 85% carries the qualification of “Superior Recovery Prospects” based on GCR’s Global Structurally Enhanced Corporate Bonds Rating Criteria. The calculated recovery prospects are noted to be in line with the estimated recoveries established after the release of properties in September 2018 as mentioned above. As such, the rating assigned to the Group 1 Notes is considered appropriate and a three-notch rating uplift on the national scale is deemed appropriate. Accordingly, the ratings of the Senior Secured Notes are upgraded to ‘AAA(ZA)(EL)’.

Analytical contacts

Primary analyst Tinashe Mujuru Structured Finance Analyst
Johannesburg, ZA TinasheM@GCRratings.com +27 11 784 1771
Secondary analyst Charlene Chipoyera Structured Finance Analyst
Johannesburg, ZA CharleneC@GCRratings.com +27 11 784 1771
Committee chair Yohan Assous Sector head: Structured Finance Ratings
Johannesburg, ZA Yohan@GCRratings.com +27 11 784 1771

Related criteria and research

Global Master Structured Finance Rating Criteria, updated September 2018
Global Structurally Enhanced Corporate Bonds Rating Criteria, updated November 2018
Criteria for Rating Real Estate Investment Trusts and Other Commercial Property Companies, updated May 2019
Vukile Property Fund Limited Rating Report, published August 2019
Vukile Property Fund Limited Senior Secured Notes Rating Report, published July 2018
Vukile Property Fund Limited Senior Secured Notes Rating Announcement, published September 2018

Ratings history

Vukile Property Fund Limited Senior Secured Notes

Security class Stock code Rating scale Rating Outlook/Watch Initial Rating Date
Senior Secured Notes VKE07 National AA+(ZA) Stable May 2015
Senior Secured Notes VKE09 National AA+(ZA) Stable May 2017
Senior Secured Notes VKE10 National AA+(ZA) Stable May 2017
Security class Stock code Rating scale Rating Outlook/Watch Last Rating Date
Senior Secured Notes VKE07 National AA+(ZA) Stable Sep. 2018
Senior Secured Notes VKE09 National AA+(ZA) Stable Sep. 2018
Senior Secured Notes VKE10 National AA+(ZA) Stable Sep. 2018

Glossary

Bond A long term debt instrument issued by either a company, institution or the government to raise funds.
Corporate Credit Rating A credit rating accorded to a corporate entity.
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
Default A default occurs when: 1.) The Borrower is unable to repay its debt obligations in full; 2.) A credit-loss event such as charge-off, specific provision or distressed restructuring involving the forgiveness or postponement of obligations; 3.) The borrower is past due more than X days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors.
Domestic Medium Term Note Programme A debt issuance programme that allows an Issuer the continued and flexible issuance of several types of securities in accordance with the programme terms and conditions.
Expected Loss Losses that a bank expects to bear over a certain period (generally a year). These losses are a consequence of doing business, namely the bank’s role as financial intermediary.
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.
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.
Loss 1. A tangible or intangible, financial or non-financial loss of economic value. 2. The happening of the event for which insurance pays (insurance).
Market An assessment of the property value, with the value being compared to similar properties in the area.
Notching A movement in ratings.
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.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
Probability The likelihood or relative frequency of an event expressed in a number between zero and one. The throw of a die is an example. The probability of throwing five is found by dividing the number of faces that have a five (1) by the total number of faces (6). That is a probability of one-sixth or one divided by six, which is .17.
Property Movable or immovable asset.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
Real Estate Investment Trust A REIT is a company that owns or finances income-producing real estate. REITs are subject to special tax considerations and generally pay out all of their taxable income as distributions to shareholders.
Real Estate Property that consists of land and / or buildings.
Recovery The action or process of regaining possession or control of something lost. To recoup losses.
Release An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.
Retention The net amount of risk the ceding company keeps for its own account.
Security One of various instruments used in the capital market to raise funds.
Senior A security that has a higher repayment priority than junior securities.
Stock Code A unique code allocated to a publicly listed security.
Structured Bond Ratings See GCR Rating Scales, Symbols and Definitions.
Structured Finance A method of raising funds in the capital markets. A Structured Finance transaction is established to accomplish certain funding objectives whist reducing risk.
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.
Ultimate Payment A measure of the principal debt, interest, fees and expenses being repaid over a period of time determined by recoveries.
Upgrade The rating has been raised on its specific scale.
Valuation An assessment of the property value, with the value being compared to similar properties in the area.

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; and d.) the validity of the ratings are for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

The credit ratings have been disclosed to Issuer and Administrator. The ratings above were solicited by, or on behalf of, the Issuer, and therefore, GCR has been compensated for the provision of the ratings.

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

  • Compliance Certificate dated 14 June 2019.
  • Property valuation documents of the Group 1 Property Portfolio.
  • Large lease expiries of the Group 1 Property Portfolio as at March 2019.
  • Tenancy lease schedules as at March 2019.
  • Forecast income and expenses per property as at March 2019.
  • Vacancy and arrear levels per property as at March 2019.
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