Johannesburg, 24 April 2015 — Global Credit Rating Co. (‘GCR’) has accorded an indicative, public Long Term credit rating of ‘AA+(ZA)’ with a Stable outlook to the following Group 1 Note to be issued on 8 May 2015:
- R580m Senior Secured Note (‘New Note’).
- R580m Senior Secured Notes, stock code VKE01, maturity 8 May 2015;
- R200m Senior Secured Notes, stock code VKE02, maturity 8 May 2016; and
- R240m Senior Secured Notes, stock code VKE03, maturity 8 May 2017.
Concurrently, GCR affirmed the final, public Long Term credit ratings of ‘AA+(ZA)’ with a Stable outlook accorded to the following Group 1 Notes issued on 8 May 2012:
The Senior Secured Notes are jointly referred to as the Group 1 Notes. The Issuer plans to repay the R580m VKE01 Note with the proceeds of the New Note.
RATING RATIONALE
The Group 1 Property Portfolio of the Transaction is of a diversified nature, comprising a mix of office/commercial (27.9%), industrial (22.3%), retail (26.9%) and mixed use (22.9%) properties. Vukile’s Group 1 Property Portfolio recorded a 6.9% rise in the market value to R3.67bn as at 30 September 2014 (including the Jhb Parktown Oakhurst property), from R3.43bn as at 30 September 2013. Vukile had 12 assets (R1.42bn) in the Group 1 Property Portfolio valued in March 2014 and the remaining 17 (R2.25bn) properties valued during September 2014. Vukile’s properties are valued every six months on a rotational basis by independent external valuers (Broll, Jones Lang LaSalle, Knight Frank and Quadrant Properties).
Vacancy rates as a percentage of rentals on Vukile’s Group 1 Property Portfolio have increased marginally from 3.7% as at September 2014 to 4.2%. Vukile continues to encounter challenges in the office property market, which resulted in vacancies increasing slightly from 6.2% (September 2013) to 6.8% (February 2015).
The property lease expiries (measured in GLA) are: 29.4% in 2015, 19.2% in 2016, 15.8% in 2017, and 29.7% from 2018 onwards with the remainder 5.9% being Vacant and Mothballed. The tenant lease expiries (measured in GLA) are: 24.1% in 2015, 20.3% in 2016, 14.3% in 2017 and 41.3% from 2018 onwards.
The arrears for the Group 1 Property Portfolio have increased from R13.3m (March 2014) to R15.5m (September 2014) to R21.5m (February 2015) – including the Jhb Parktown Oakhurst and Centurion 259 West Street properties that are to be sold.
The rating of the Secured Notes is derived by applying a notching approach, starting from the Long Term senior unsecured corporate credit rating of the Issuer. The Issuer is currently rated ‘A(ZA)’ and ‘A1(ZA)’ on the Long and Short Term scales respectively, with the Long Term rating being on Positive outlook. Based on GCR’s Global Structurally Enhanced Corporate Bonds Rating Criteria, the calculated overall recovery rate of 100% carries the qualification “Excellent Recovery Prospects”. A four notch rating uplift on the national scale is deemed to be appropriate for the Transaction. Accordingly, GCR has accorded and affirmed a final, public Long Term rating of ‘AA+(ZA)’ to the Group 1 Notes, with a Stable outlook.
RATINGS HISTORY
ANALYTICAL CONTACTS
Corné Els
Structured Finance Analyst
+27 11 784 1771
Committee Chairperson
Emma-Jane Fulcher
Head: Structured Finance Ratings
+27 11 784 1771
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Summary Structurally Enhanced Corporate Bonds Rating Criteria – revised Oct ’14;
Vukile Property Fund Ltd Senior Secured Report – Dec ’14;
Global Master Criteria for Rating Corporate Entities – Feb ’15;
Global Summary Criteria for Rating Property Funds – Apr ’15; and
Vukile Property Fund Ltd Rating Report – Feb ’15.
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.
| Agent | An agreement where one party (agent) concludes a juristic act on behalf of the other (principal). The agent undertakes to perform a task or mandate on behalf of the principal. |
| Agreement | A negotiated and usually legally enforceable understanding between two or more legally competent parties. |
| Applicable Pricing Supplement | A transaction document that describes the particulars of notes issued. |
| 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. |
| Arrears | General term for non-performing obligations, i.e. obligations that are overdue. |
| Asset | An item with economic value that an entity owns or controls. |
| Bond | A long term debt instrument issued by either: a company, institution or the government to raise funds. |
| Claim | A formal request or demand. |
| Corporate Credit Rating | A credit rating accorded to a corporate entity. |
| 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. |
| Credit Rating Agency | An entity that provides credit rating services. |
| Credit Risk | The probability or likelihood that a borrower or issuer will not meet its debt obligations. Credit Risk can further be separated between current credit risk (immediate) and potential credit risk (deferred). |
| Creditworthiness | An assessment of a debtor’s ability to meet debt obligations. |
| Debt | An obligation to repay a sum of money. |
| Debtor | The party indebted or the person making repayments for its borrowings. |
| Enforceable | To make sure people do what is required by a law or rule et cetera. |
| Forecast | A calculation or estimate of future financial events. |
| Income | Money received, especially on a regular basis, for work or through investments. |
| Insurance | Provides protection against a possible eventuality. |
| Issuer | The party indebted or the person making repayments for its borrowings. |
| Lease | Agreement or temporary use and enjoyment of a corporeal thing (movable or immovable property) the whole or part thereof for rent. The essential elements of a contract of lease are: 1.) Undertaking of lessor to give the lessee the use and enjoyment of something; 2.) Agreement between the lessor and lessee that the lessee’s right to use and enjoyment is temporary; and 3.) Lessee’s undertaking to pay a sum or rent. |
| Legal Opinion | An opinion regarding the validity and enforceable of a transaction’s legal documents. |
| Lender | A credit provider that is owed debt obligations by a debtor. |
| Lessee | The party that enjoys temporary use of a corporeal thing. |
| Lessor | The owner or agent that acts on behalf of the owner of property that grants the temporary use of a corporeal thing. |
| Liability | All financial claims, debts or potential losses incurred by an individual or an organisation. |
| Liquidity | The ability to repay short-term obligations or short-term availability of liquid assets to a market or entity. |
| Liquidity Risk | The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market. |
| 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. |
| Notching | A movement in ratings. |
| Obligation | The title given to the legal relationship that exists between parties to an agreement when they acquire personal rights against each other for entitlement to perform. |
| Performing | An obligation that performs according to its contractual obligations. |
| Pricing | A process of determining the price of a debt security. |
| Principal | The total amount borrowed or lent, e.g. the face value of a bond, excluding interest. |
| Proceeds | Funds from issuance of debt securities or sale of assets. |
| Property | Movable or immovable asset. |
| Provision | An amount set aside for expected losses to be incurred by a creditor. |
| Ranking | A priority applied to obligations in order of seniority. |
| Recovery | The action or process of regaining possession or control of something lost. To recoup losses. |
| Redemption | The repurchase of a bond at maturity by the issuer. |
| Rent | Payment from a lessee to the lessor for the temporary use of an asset. |
| 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. |
| Securities | Various instruments used in the capital market to raise funds. |
| 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. |
| Servicer | A transaction appointed agent that performs the servicing of mortgage loans, loan or obligations. |
| Servicing | The calculation of interest and repayments, collection of repayments, advancing of loans, foreclose procedures, maintaining records and seeing that the proceeds of each loan are passed on to the respective party. |
| 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. |
| 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. |
| 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. |
| Vacancy | In commercial property, usually expressed as a percentage of unoccupied floor space in relation to the GLA. |
| 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 rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The Arranger and the Issuer participated in the rating process via face-to-face meetings, teleconferences and other written correspondence. Furthermore, the quality of info received was considered adequate and has been independently verified where possible.
The rating/s above were solicited by the Arranger of the Transaction; GCR has been compensated for the provision of the ratings.
The credit rating/s has been disclosed to the Arranger and the Issuer with no contestation of the rating.
The information received from the Arranger / Issuer:
- Property valuation documents of the Group 1 Property Portfolio.
- Group 1 Property Portfolio insurance confirmation from Wills South Africa (Pty) Ltd, dated 16 April 2015.
- Large lease expiries of the Group 1 Property Portfolio per February and March 2015.
- Income and expenses per property per February 2015.
- Tenancy lease schedules per February 2015.
- Property risk grades.
- Forecast income and expenses per property as at February 2015.
- Vacancy and arrear levels per property as at February 2015.
- Draft Applicable Pricing Supplements and term sheet for the New Note.
- The Issuer’s Integrated Annual Report for the year ended 31 March 2014.
- Updated legal opinion from the Transaction legal counsel.
- A letter, signed by Mr MJ Potts in his capacity as Financial Director, confirming that none of the Group 1 Property Portfolio properties are dually ceded.