GCR has accorded national scale Naira currency long term ratings of BBB and AA- to the Series 1 N3.6bln Tranche A and N1bln Tranche B bonds respectively issued by Tower Funding Plc (the ‘Issuer’), a SPV owned by the Tower Companies. Both tranches benefit from a guarantee provided by GuarantCo Ltd (whom GCR considers commensurate with a AAA long term Naira currency national scale rating), albeit to differing extents. As per the guarantee, GuarantCo irrevocably and unconditionally guarantees the proper and punctual payment of
i) principal due by the Issuer under the Series 1 Trance A Bonds up to a maximum of N1.2bln, one third of the principal.
ii) principal and interest payments due by the Issuer under the Series 1 Tranche B Bonds up to a maximum of N1bln, or 100% of principal.
Furthermore Tower Funding benefits from other structural enhancements, including a minimum reserve account and performance oversight by independent Trustees.
The rating of the Bonds was derived by applying a notching up approach, starting from the long term corporate credit rating of the Tower Companies. In this regard, when reviewing the Tower Companies’ recent financial performance, the corporate credit rating was downgraded to BB. This is due to the fact that earnings and cash flow underperformance has exerted significant funding pressure on the group. Of great concern was that YTD11 accounts show a net loss before tax of N693mln, compared to the full year NPBT forecast of N2.8bln. Thus, net debt increased to N27.8bln at YTD11, compared to a budgeted reduction to N16.3bln forecast by FYE11. Accordingly key gearing metrics significantly deteriorated at YTD11 compared to F10 and forecast, with net gearing at 627% (forecast: 211%) and net interest coverage of 1.1x (forecast: 2.2x).
Based on the reasons given by management for the underperformance, GCR expects corrective action to take between 18 to 24 months to be effective, with gearing levels well above budget likely to persist over the period.
Considering the nature of the guarantees supporting the specific Tower Funding debt issues, and in accordance with GCR’s Global Structurally Enhanced Corporate Bonds Criteria, the maximum rating that can be accorded to the Trance A and B bonds is BBB and AA- respectively.
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