Johannesburg, 2 May 2017 — Global Credit Ratings (‘GCR’) has accorded indicative, public long term credit ratings of ‘AA+(ZA)’ with a Stable outlook to the following Group 1 Notes to be issued by Vukile Property Fund Limited (‘Vukile’):
- R300m Senior Secured Note, stock code VKE09, maturity 8 July 2020; and
- R300m Senior Secured Note, stock code VKE10, maturity 8 July 2022.
GCR concurrently affirmed the final, public long term credit ratings of ‘AA+(ZA)’ with a Stable outlook to the following Group 1 Notes issued by the Issuer:
- R240m Senior Secured Note, stock code VKE03, maturity 8 May 2017;
- R380m Senior Secured Note, stock code VKE06, maturity 8 May 2018; and
- R200m Senior Secured Note, stock code VKE07, maturity 8 June 2020.
The Senior Secured Notes are jointly referred to as the Group 1 Notes. The VKE03 Notes are scheduled to mature on 8 May 2017.
The indicative, public ratings accorded to the Group 1 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).
RATING RATIONALE
Vukile’s refocused investment strategy has seen it transition into a retail-oriented fund, having achieved its objective of improving the overall quality and size of the portfolio. Post finalisation of the forthcoming transaction with GemGrow Properties Ltd, Vukile’s total property investments are expected to be valued at c.R14.7bn at year-end FY17 (FY13: R7.7bn).
The current Group 1 Property Portfolio is of a diversified mix, measured in Open Market Value, comprising of office/commercial (0.4%), industrial (8.8%), retail (72.0%) mixed use (16.8%) and residential (1.9%) properties. Vukile’s properties are valued every six months on a rotational basis by independent external valuers (Knight Frank and Quadrant Properties). Vacancy rates as a percentage of rentals on Vukile’s Group 1 Property Portfolio have decreased to 5.0% at March 2017 from 6.3% at March 2016.
The property lease expiry profile of the Group 1 Property Portfolio (measured in GLA) is: 47.0% in 2018, 14.9% in 2019, 8.1% in 2020, and 23.4% from 2021 onwards with the remaining 6.6% being Vacant and/or Mothballed. 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), then decreased to R16.8m (March 2016), and finally increased to R25.6m (March 2017). At March 2017, the Group 1 Property Portfolio had top 10 tenants contributing 40.1% in Gross Rentals with the same tenants occupying 36.0% of GLA.
The rating of the Group 1 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 an indicative, public long term rating of ‘AA+(ZA)’ to the VKE09 and VKE10 Group 1 Notes, with a Stable outlook. GCR concurrently affirmed the final, public long term rating of ‘AA+(ZA)’ to the existing Group 1 Notes, with a Stable outlook.
RATINGS HISTORY
ANALYTICAL CONTACTS
Primary Analyst
Corné Els
Structured Finance Analyst
+27 11 784 1771
Committee Chairperson
Emma-Jane Fulcher
Sector Head: Structured Finance Ratings
+27 11 784 1771
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Summary Structurally Enhanced Corporate Bonds Rating Criteria – revised Sep ’16
Vukile Property Fund Ltd Group 1 Notes Surveillance Report – May ’16, and the subsequent rating announcement.
Global Master Criteria for Rating Corporate Entities – Feb ’17
Global Summary Criteria for Rating Property Funds – Feb ’17
Vukile Property Fund Ltd Rating Report – Mar ’17
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.
| Arrears | General term for non-performing obligations, i.e. obligations that are overdue. |
| Bond | A long term debt instrument issued by either: a company, institution or the government to raise funds. |
| 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. |
| 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. |
| 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. |
| 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. |
| 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. |
| Principal | The total amount borrowed or lent, e.g. the face value of a bond, excluding interest. |
| Property | Movable or immovable asset. |
| Recovery | The action or process of regaining possession or control of something lost. To recoup losses. |
| Rent | Payment from a lessee to the lessor for the temporary use of an asset. |
| 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. |
| Vacancy | In commercial property, usually expressed as a percentage of unoccupied floor space in relation to the GLA. |
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 Issuer and the Arranger 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 Issuer and the Arranger of the Transaction; GCR has been compensated for the provision of the ratings.
The credit rating/s has been disclosed to the Issuer and the Arranger with no contestation of the rating.
The information received from the Arranger / Issuer:
- Property valuation documents of the Group 1 Property Portfolio.
- Large lease expiries of the Group 1 Property Portfolio per March 2017.
- Income and expenses per property per March 2017.
- Tenancy lease schedules per March 2017.
- Property risk grades.
- Forecast income and expenses per property as at April 2017.
- Vacancy and arrear levels per property as at March 2017.
- The Issuer’s Integrated Annual Report for the year ended 31 March 2016.
- Updated draft legal opinion from the Transaction legal counsel.
