Tower Funding Plc – N4.6bn Medium Term Note Programme
GCR has downgraded the long term ratings of the both Tranches under the Tower Funding Series 1 Issue. This follows the downgrading of the theoretical long term corporate rating for the Tower Group to BB-(NG) (double B minus) in November 2012, from BB(NG) (double B) in November 2011. The rating remains on ‘Negative Outlook’, As do the Series 1 bond ratings.
Both Tranches benefit from a partial Guarantee provided by Gaurantco, albeit to differing extents. GCR is of the opinion that the credit quality of GuarantCo is commensurate with a ‘AAA’ long term Naira currency national scale rating. The rating of the Bonds is derived by applying a notching up approach, starting from the long term corporate credit rating of the Tower Companies. The rating of the bond Tranches is thus:
Tranche A – BB+(NG) (double B plus). The tranche A bond rating is more closely linked to the theoretical corporate rating as expected recoveries are considered ‘Average’. A lesser rating uplift of up to 2 national scale notches is now deemed appropriate for the Series 1 Tranche A Bonds, given the weaker financial position of the Group.
Tranche B – A+(NG) (single A plus). Given the mechanics of the guarantee, whereby 100% of the principle is guaranteed, rrecovery prospects are considered ‘Excellent”. Thus, a much higher rating uplift is deemed appropriate.
While the Tower Group enjoys dominant domestic market shares in most its product lines, with strong brand awareness and a substantial manufacturing infrastructure, operations have come under severe competition from cheaper Chinese imports, significantly eroding the Group’s competitiveness. This continued margin pressure has resulted in a decline in EBITDA, despite revenue growth. Although EBITDA improved at 1H F12, operating profit has again been insufficient to cover the interest charge, with net interest coverage remaining below 1x since F08.
Working capital absorptions and capex have seen gross debt increase significantly, with net gearing rising to 613% at FYE11 and net debt to EBITDA to 1,234%. Although debt eased at 1H F12, gearing metrics remain well above acceptable levels for investment grade companies.
To date Tower’s bankers have supported the company extending continuing to extend credit for working capital. However, facilities have all reached their limits and GCR considers there to be little additional borrowing capacity. If no additional funding is forthcoming, Tower could find itself in a severe liquidity crunch with the potential to significantly constrain production levels and call into question the group’s ability to meet its debt obligations. The proposed recapitalisation is thus considered crucial to shoring up Tower’s balance sheet and ensuring the group’s on-going viability. Whilst GCR views this positively, comfort could not be derived given the lack of detailed plans.
CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.
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