Johannesburg, 21 October 2016 — Global Credit Ratings (‘GCR’) has affirmed the final, public long-term credit ratings of ‘A(ZA)’ with a ‘Stable’ Outlook, accorded to the following Notes issued by Hospitality Property Fund Limited (‘HPF’ or the ‘Issuer’) under the Issuer’s DMTN Programme (the ‘Transaction’):
- R400m, Senior Secured Floating Rate Notes, Stock Code: HPF04, maturing 17 February 2017;
- R200m, Senior Secured Fixed Rate Notes, Stock Code: HPF05, maturing 17 February 2017;
- R60m, Senior Secured Floating Rate Notes, Stock Code: HPF06, maturing 20 February 2020;
- R80m, Senior Secured Floating Rate Notes, Stock Code: HPF07, maturing 20 August 2017;
- R150m, Senior Secured Floating Rate Notes, Stock Code: HPF09, maturing 15 April 2019.
The Notes listed above are collectively referred to as the ‘Senior Notes’. The review of the ratings of the Senior Notes follows the anticipated disposal of properties which form part of the secured portfolio.
RATING RATIONALE
The Senior Notes are secured by a portfolio of the Issuer’s hotels (the underlying collateral). The Transaction entails the public listing of the Senior Notes on the Interest Rate Market of the Johannesburg Stock Exchange and forms part of the Issuer’s established R2bn Domestic Medium Term Note Programme. The Transaction sponsor is Rand Merchant Bank (‘RMB’) (a division of First Rand Bank Ltd). RMB also serves as the Arranger, amongst other roles for the Transaction.
The board of HPF has agreed to dispose of ‘Inn On The Square’, a property located in Cape Town and which currently forms part of the security pool. The agreed price for the disposal will see HPF realise a 36.8% premium on the June 2016 independent valuation of the property. The transfer of ownership is expected to take effect before the end of December 2016, as the necessary consent from the Hospitality Guarantee SPV to dispose of the property has already been acquired. To date, the group has sold a total of seven Kopanong Hotel and Conference Centre chalets, out of the 10 chalets that were originally for sale. The cash received from these disposals is anticipated to be utilised either for future acquisitions, or to settle the portion of Secured Notes scheduled to mature in February 2017. HPF plans on including additional unencumbered properties to the secured portfolio, that were acquired from their transaction with Tsogo Sun Holdings Limited and are estimated to be in excess of R300m.
The total Open Market Valuation of the secured portfolio is expected to remain constant at R2.8bn, based on June 2016 valuations, with the abovementioned disposals constituting 4.1% of the portfolio value at the April 2016 refinance. GCR received an audit report prepared by KPMG Inc. in connection with the calculation of the financial covenants as at 31 August 2016. The LTV ratio, calculated net of the anticipated disposals, is expected to increase to 38.1% (covenant ≤45%), but should reduce to below 35% after the planned inclusion of additional properties. The financial covenants calculated at the Measurement Date of 30 June 2016 reported an LTV ratio of 36.5%, while the Interest Cover Ratio was reported at a lower 2.4x (covenant ≥2x), compared to the December 2015 report of 35.1% and 2.7x respectively.
Based on GCR’s Global Structurally Enhanced Corporate Bonds Rating Criteria and the anticipated sale of the above mentioned properties, the calculated overall recovery rate is expected to decline to 92.9% and carry the qualification of ‘Excellent Recovery Prospects’. A rating uplift of two national scale notches was deemed to be appropriate for this particular Transaction due to the level of uncertainty regarding which exact properties will form part of the portfolio, following on from the conclusion of the Tsogo Sun transaction and the proximity of the maturity date for some of the Senior Notes which may be refinanced. Accordingly, GCR affirmed the final, public ratings of ‘A(ZA)’ with a ‘Stable’ Outlook accorded to the Senior Notes. The two-notch uplift is in contrast to the three notches accorded previously and this is due to the recent upgrade of the underlying corporate Issuer rating (October 2016) from BBB(ZA) to BBB+(ZA). GCR will perform a full analysis of the security pool upon the pending Senior Notes’ maturity to re-assess the potential recovery prospects and implied ratings of the Senior Notes. Furthermore, GCR notes that the deterioration in the recovery rate leaves the expected recovery prospects at the lower end of the recoveries band and close to the rating trigger.
The final, public ratings accorded to the Senior Notes relate to ultimate payment of interest and principal (as opposed to timely, akin to an expected loss rating, which is a function of probability of default and loss severity). The ratings exclude an assessment of the ability of the Issuer to pay any (early repayment) penalties. If the rating accorded to the Issuer changes, the ratings of the Senior Notes may change, but potentially not in the same scale. For more information on the Transaction, please read GCR’s Hospitality Property Fund Ltd – New Issuance Report, published in April 2016 and GCR’s Hospitality Property Fund Corporate Rating Announcement, published in October 2016.
RATINGS HISTORY
ANALYTICAL CONTACTS
Tinashe Mujuru
Junior Analyst
+27 11 784 1771
Mark Vrdoljak
Senior Credit Analyst
+27 11 784 1771
Committee Chairperson
Patricia Zvarayi
Senior Credit Analyst
+27 11 784 1771
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
- Global Structurally Enhanced Corporate Bonds Rating Criteria (Sep’16);
- Criteria for Rating Property Funds (May’16);
- Criteria for Rating Corporate Entities (Feb’16);
- HPF Corporate Rating Announcement (Oct’16);
- Hospitality Property Fund Limited R890m Senior Secured Notes – New Issuance Report (Apr’16).
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO/RATING-SCALES-DEFINITIONS. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S STRUCTURED FINANCE GLOSSARY
| Arranger | Usually an Investment bank that advises and constructs a transaction and acts as a conduit between the transaction parties: Client, Issuer, Credit Rating Agency, Investors, Legal Counsel and Servicers. |
| Bond | A long term debt instrument issued by either: a company, institution or the government to raise funds. |
| Collateral | An asset pledged as security in event of default. |
| 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 | 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 |
| 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. |
| 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. |
| Fixed Rate Notes | Debt securities that have a fixed interest rate over its. |
| Floating Rate Notes | Debt securities that have a periodic interest rate reset in relation to the reference rate, i.e. JIBAR. |
| Guarantee | An undertaking for performance of another’s obligations in event of default. |
| International Scale Rating LC | International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions. |
| Issuer | The party indebted or the person making repayments for its borrowings. |
| Long-Term Rating | A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations. |
| Loss | A tangible or intangible, financial or non-financial loss of economic value. |
| Market | An assessment of the property value, with the value being compared to similar properties in the area. |
| Principal | The total amount borrowed or lent, e.g. the face value of a bond, excluding interest. |
| Property | Movable or immovable asset. |
| Rating Outlook | A Rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered). |
| Recovery | The action or process of regaining possession or control of something lost. To recoup losses. |
| Refinance | 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. |
| Repayment | Payment made to honour obligations in regards to a credit agreement in the following credited order: 3.) Satisfy the due or unpaid interest charges; 4.) Satisfy the due or unpaid fees or charges; and 5.) To reduce the amount of the principal debt. |
| Security | An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default. |
| Senior | A security that has a higher repayment priority than junior securities. |
| Short-Term Rating | A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions. |
| Stock Code | A unique code allocated to a publicly listed security. |
| Transaction | A transaction that enables an Issuer to issue debt securities in the capital markets. 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. |
| Ultimate Payment | A measure of the principal debt, interest, fees and expenses being repaid over a period of time determined by recoveries. |
| Valuation | An assessment of the property value, with the value being compared to similar properties in the area. |
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings 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 Issuer and the Arranger participated in the rating process via face-to-face meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The ratings above were solicited by the Issuer of the Transaction; GCR has been compensated for the provision of the ratings.
The credit ratings have been disclosed to the Issuer and the Arranger with no contestation of the ratings.
The information received from the Arranger and other reliable third parties to accord the credit ratings included the latest Issuer’s audited annual financial statements for the year ending June 2015; the Issuer’s integrated annual report as at June 2016; an overview of the Issuer’s Hotel portfolio for the period ending 31 December 2015; a performance forecast for the period beginning December 2012 and ending December 2018; a schedule of the insurance policies covering the hotels serving as security; the applicable Open Market Valuation Reports; audited compliance certificate as at 30 June 2016 and 31 August 2016; the signed letter of consent for the disposal of the abovementioned property; signed and executed transaction documentation; legal and tax opinions; with reference to the SENS announcement on HPF’s disposal of Inn On The Square.
