Announcements Rating Alerts Structured Finance

Hospitality Property Fund Limited – Indicative Credit Rating Assigned and Existing Credit Ratings Affirmed

Rating Action

Johannesburg, 13 December 2019 – GCR Ratings (“GCR”) has accorded an indicative long-term issue credit rating of AA(ZA)(EL)(IR) with a Stable Outlook to the following Notes to be issued by Hospitality Property Fund Limited (“HPF” or “the Issuer”), under its R10bn Domestic Medium-Term Note (“DMTN”) Programme:

Security Class Stock Code Amount Rating class Rating scale Rating Outlook Maturity Date
Senior Secured Notes HPF13 R800,000,000 Issue Long Term National AA(ZA)(EL)(IR) Stable Sep 2024

Concurrently, GCR affirmed the public long-term credit ratings of AA(ZA)(EL) with Stable Outlooks of the following existing Notes issued by HPF (the “Existing Notes”):

Security Class Stock Code Amount Rating class Rating scale Rating Outlook Maturity Date
Senior Secured Notes HPF06 R60,000,000 Issue Long Term National AA(ZA)(EL) Stable Feb 2020
Senior Secured Notes HPF11 R600,000,000 Issue Long Term National AA(ZA)(EL) Stable Mar 2023
Senior Secured Notes HPF12 R300,000,000 Issue Long Term National AA(ZA)(EL) Stable Mar 2024

* Prior to the publication of GCR’s Rating Scales, Symbols and Definitions in May 2019, structured bond ratings did not carry the ‘EL’ suffix.

It is important to highlight that only the notes are rated, not the Programme. The indicative rating assigned to the HPF13 Notes expires on 31 January 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 structured bond rating assigned to the Notes issued by HPF differs from the A-(ZA) long-term senior unsecured credit rating of the Issuer.

Rating Rationale

To date, the Issuer has ceded the vast majority of its property portfolio of 50 properties, with an aggregate Open Market Value (“OMV”) of R11.5bn, as collateral backing the issue of secured debt under the DMTN Programme. The OMV of the 50 properties, as valued at March 2019, has declined by 2.1% since they were last valued in March 2018, when they had an aggregate OMV of R11.7bn. The mortgage bonds in respect of all of the ceded properties have been registered in favour of the Debt Guarantor. Additionally, all related rights to and interests in the ceded properties, including bank accounts and insurance proceeds, were ceded in securitatem debiti to the Debt Guarantor, which may realise this security for the benefit of the Issuer’s secured creditors, including the secured noteholders. All portfolio properties are valued annually and independently by Excellerate Real Estate Services (Pty) Limited.

HPF plans to issue new Secured Notes of R800m, Stock Code HPF13, in December 2019.

Currently and prior to this planned issuance, HPF’s secured debt amounts to R2.31bn, comprising the Senior Secured HPF06 (R60m), HPF11 (R600m) and HPF12 (R300m) Notes, as well as utilised secured debt facilities with Standard Bank of South Africa (“SBSA”) of R1.35bn, comprising two utilised term facilities (“Facility A” of R550m and “Facility B” of R500m) of a combined R1.05bn and one revolving credit facility (“RCF”) of a committed R500m, of which R298.5 has been drawn down. As such, the Loan to Value ratio (“LTV”), which relates to the secured and utilised debt, is 20.16%, which is considerably lower than the financial covenant LTV of 45%. Since HPF’s unsecured HPF08 Notes reached maturity and were repaid in April 2019, HPF has had no unsecured debt outstanding. HPF has additional available but unutilised secured debt facilities – the abovementioned SBSA RCF of R201.5m and a Nedbank RCF of R250m.

HPF plans to use R550m of the planned R800m HPF13 proceeds to repay and cancel SBSA Facility A. This implies a net increase in secured debt and facilities of R250m, resulting in a post-issuance LTV of 22.3%.

It is important to note that GCR’s recovery scenarios and resultant rating assume that the Issuer issues secured debt and/or utilises secured facilities up to the maximum LTV covenant of 45%.

The ratings of the Senior Secured Notes are derived by applying a notching-up approach, starting from the long-term senior unsecured corporate credit rating of the Issuer. The number of notches granted is dependent on the recovery prospects in the event of default and enforcement in a fire-sale scenario, as modelled by GCR, assuming, as mentioned, that secured debt is in issue at the maximum covenant LTV of 45%.

The modelled recovery rate has improved marginally since the last (April 2019) rating action, from 89.6% to 91.9%. Therefore, GCR maintained its four-notch uplift from the Issuer’s national scale rating, leading to the rating action outlined above. This is despite the fact that, according to GCR’s Criteria for Rating Secured Bonds – November ’18, a modelled recoverability of above 90% is designated to represent “Excellent” recovery prospects, while below 90% (and greater than 70%) is referred to as “Superior”. GCR’s modelling outcome has crossed this threshold as a result of the slightly lower expected weighted average interest rate on secured debt and facilities (utilised and unutilised) that is an input to the model, and does not imply a tangible change in recovery prospects.

Ratings History

Stock Code Review Rating Scale Rating Outlook Date
HPF06 Initial Rating National A(ZA) Stable 18 Feb ’15
Last Rating National AA(ZA) Stable 17 Apr ’19
HPF11 Initial Rating National AA-(ZA) Stable 19 Feb ’18
Last Rating National AA(ZA) Stable 17 Apr ’19
HPF12 Initial Rating National AA(ZA) Stable 17 Apr ’19
Last Rating National AA(ZA) Stable 17 Apr ’19
HPF13 Initial Rating National AA(ZA) Stable 13 Dec ’19
Last Rating National AA(ZA) Stable 13 Dec ’19

Analytical Contacts

Primary Analyst Yehuda Markovitz Structured Finance Analyst
Johannesburg, ZA yehudam@GCRratings.com +27 11 784 1771
Secondary Analyst Vuyisile Madlebe Structured Finance Analyst
Johannesburg, ZA vuyisilem@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

Criteria for Rating Secured Bonds – November ’18
Hospitality Property Fund Limited Rating Announcement (Issuer Rating) – September ’19

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S GLOSSARY

Bond A long-term debt instrument issued by either a company, institution or the government to raise funds.
Cede To transfer all or part of a risk written by an insurer (the cedant or primary company) to a reinsurer.
Collateral Asset provided to a creditor as security for a loan or performance.
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.
Creditor A credit provider that is owed debt obligations by a debtor.
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.
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.
Enforcement To make sure people do what is required by a law or rule et cetera.
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.
Facility The grant of availability of money at some future date in return for a fee.
Floating Rate Note A floating rate note/bond is a medium-term debt instrument that pays a variable interest rate. The coupon is usually set at a premium to LIBOR or its local equivalent such as JIBAR.
Floating Rate Notes Debt securities that have a periodic interest rate reset in relation to the reference rate, i.e. JIBAR.
Guarantor A party that gives the guarantee.
Insurance Provides protection against a possible eventuality.
Interest Rate The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.
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).
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
National Scale Rating National scale ratings measure creditworthiness relative to issuers and issues within one country.
Notching A movement in ratings.
Noteholder Investor of capital market securities.
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.
Proceeds Funds from issuance of debt securities or sale of assets.
Property Movable or immovable asset.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
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.
Secured Creditor A creditor that has specific assets pledged as collateral that will receive the proceeds in the event of default.
Secured Debt Debt backed with or secured by collateral to reduce lending risk and thus the interest rate charged.
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.
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.

For a detailed glossary of terms utilised in this announcement please click here.

SALIENT POINTS OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings is influenced by any other business activities of the credit rating agency; b.) the ratings are based solely on the merits of the rated entity, securities or financial instruments being rated; c.) such ratings are an independent evaluation of the risks and merits of the rated entity, securities or financial instruments; 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 the Issuer. The ratings above were solicited by, or on behalf of, the Issuer and, therefore, GCR is compensated for the provision of the ratings.

HPF 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 HPF and other reliable third parties to accord the credit rating included:

  • Covenant compliance certificates
  • Valuation report – March 2019
  • Occupancy and rental income data
  • Draft legal opinion
  • Draft Applicable Pricing Supplement (HPF13)
  • Secured debt schedule
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