Johannesburg, 26 July 2018 — Global Credit Ratings (‘GCR’) has affirmed the final, public long-term credit ratings of ‘AA+(ZA)’ with a Stable outlook accorded to the following Group 1 Notes issued by Vukile Property Fund Limited (the “Issuer”):
- R200m Senior Secured Note, stock code VKE07, maturity 8 June 2020;
- R378m Senior Secured Note, stock code VKE09, maturity 8 July 2020; and
- R194m Senior Secured Note, stock code VKE10, maturity 8 July 2022.
The R380m VKE06 Senior Secured Notes matured on 8 May 2018. The Senior Secured Notes are jointly referred to as the Group 1 Notes.
The final, 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
The Issuer’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. The Issuer’s total property investments are valued at R18.8bn in FY18 from R13.2bn in FY17, of which R4.0bn of assets are encumbered as the Group 1 Property Portfolio.
The Issuer settled the VKE06 Notes on 8 May 2018. Another issuance is planned towards mid-August 2018. GCR will assess the Transaction (existing Group 1 Notes and new issuance) on its merits and communicate the results accordingly.
The current Group 1 Property Portfolio is diversified mix, in terms of geographical exposure and sector, measured in Open Market Value (“OMV”), comprising of industrial (8.4%), retail (71.7%) mixed use (18.0%) and residential (1.8%) properties. The Issuer sold the only office building held in the portfolio slightly below market value. A portion of the Group 1 Property Portfolio is valued every six months on a rotational basis by independent external valuers (Knight Frank and Quadrant Properties). The Issuer complied with the Group 1 Notes Loan To Value (“LTV”) covenant, reported at 28.0% at 31 March 2018.
Vacancy rates as a percentage of Gross Lettable Area (“GLA”) on Vukile’s Group 1 Property Portfolio have decreased to 3.5% at March 2018 (5.0% at March 2017). The improvement is as a result of the sale of the office building, coupled with improved industrial and retail vacancies. Mothballed areas were reported as 1.2%.
The lease expiry profile of the Group 1 Property Portfolio (measured in GLA) improved substantially resulting in longer leases for 2018: 26.9% in 2018 (47.0% March 2017), 17.5% in 2019 (14.9% March 2017), 14.3% in 2020 (8.1% March 2017), and 36.8% from 2021 onwards (23.4% March 2017) with the remaining 4.6% (6.6% March 2017) being vacant and/or mothballed. The arrears for the Group 1 Property Portfolio were reported as R19.0m or 3.6% at March 2018 (R25.6m March 2017).
At March 2018, the top 10 tenants of the Group 1 Property Portfolio contributed 40.7% (40.1% March 2017) in Gross Rentals with the same tenants occupying 38.5% of GLA (36.9% March 2017).
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’s unsecured corporate credit rating was upgraded in July 2018 to ‘A+(ZA)’ and ‘A1(ZA)’ on the long and short-term scales respectively, with a Stable 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 three-notch rating uplift on the national scale is deemed to be appropriate for the Transaction. Accordingly, GCR affirmed the final, public long-term rating of ‘AA+(ZA)’ to the existing Group 1 Notes, with a Stable outlook. GCR capped the rating of the Group 1 Notes at ‘AA+(ZA)’, therefore a reversion from the previous four-notch uplift to a three-notch rating uplift from the unsecured corporate credit rating.
RATINGS HISTORY
ANALYTICAL CONTACTS
Primary Analyst
Corné Els
Senior Structured Finance Analyst
+27 11 784 1771
corneE@globalratings.net
Committee Chairperson
Yohan Assous
Sector Head: Structured Finance Ratings
+27 11 784 1771
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Structurally Enhanced Corporate Bonds Rating Criteria – Nov ’17;
Vukile Property Fund Ltd Group 1 Notes New Issuance Report – May ’17, and the subsequent rating announcement;
Global Master Criteria for Rating Corporate Entities – Feb ’18;
Global Criteria for Rating Property Funds – Feb ’18;
Vukile Property Fund Ltd Rating Report – Jul ’18.
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. |
| 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. |
| Corporate Credit Rating | A credit rating accorded to a corporate entity. |
| 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 90 days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors. |
| Exposure | Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. |
| Floating Rate Notes | Debt securities that have a periodic interest rate reset in relation to the reference rate, i.e. JIBAR. |
| Gross Lettable Area | Used in commercial property to indicate the amount of floor space rented or available for rental. |
| 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. |
| Loan | A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond. |
| 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. |
For a detailed glossary please click here
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings were 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 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:
- Compliance Certificate dated 11 June 2018.
- Property valuation documents of the Group 1 Property Portfolio.
- Large lease expiries of the Group 1 Property Portfolio as at March 2018.
- Income and expenses per property as at March 2018.
- Tenancy lease schedules as at March 2018.
- Property risk grades.
- Forecast income and expenses per property as at April 2017.
- Vacancy and arrear levels per property as at March 2018.
Vukile Property Fund Limited – Senior Secured Floating Rate Notes, Ratings Affirmed
