Johannesburg, 9 May 2016 — Global Credit Ratings (‘GCR’) has affirmed the final, public long term credit ratings of ‘AA+(ZA)’ with a Stable outlook to the following Group 1 Notes issued by Vukile Property Fund Limited (‘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 R200m VKE02 Senior Secured Notes matured on 9 May 2016 and were repaid from the new shares (R400m) listed on 21 April 2016. The VKE03 Senior Secured Notes were issued on 8 May 2012 whilst the VKE06 and VKE07 Senior Secured Notes were issued on 8 May 2015. 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).
Vukile continues to focus on strategic, yield enhancing acquisitions, while simultaneously improving key retail assets and disposing of marginal properties. The F15 Synergy Income Fund (‘Synergy’) takeover and R2bn acquisitions increased its direct and indirect property investments to R15.1bn at 1H F16 (FYE15: R13.8bn), from R6.6bn at FYE11. The Group 1 Property Portfolio, similar to Vukile, will change to a retail portfolio once the Synergy transaction has been concluded. This will, amongst others, see Vukile’s office and industrial assets be exchanged for Synergy retail assets. GCR will review the ratings once the asset exchange has been concluded.
Vukile’s improvement and expansion of existing retail assets continues, with a R429m capex budget committed at 1H F16. The Issuer also continues to recycle capital vested in non-core assets albeit that the overall value of the earmarked industrial and office assets has been markedly reduced. The proven ability to successfully redeploy these proceeds over the review period bodes positively.
The current Group 1 Property Portfolio is of a diversified mix, measured in Open Market Value, comprising of office/commercial (22.9%), industrial (22.5%), retail (29.7%) and mixed use (25.0%) properties. Vukile had 11 assets (R1.42bn) in the Group 1 Property Portfolio valued in March 2016 and the remaining 14 (R2.25bn) properties valued during September 2015. 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 increased from 4.2% as at February 2015 to 6.3% as at March 2016. The vacancy rates reduces to 3.8% should the 10,453m2 Randburg Square Residential conversion be excluded.
The property lease expiry profile of the Group 1 Property Portfolio (measured in GLA) is: 27.9% in 2016, 18.0% in 2017, 15.0% in 2018, and 31.3% from 2019 onwards with the remainding 7.9% being Vacant and/or Mothballed. The tenant lease expiries (measured in GLA) are: 28.6% in 2016, 18.5% in 2017, 15.4% in 2018 and 32.2% from 2019 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) and finally decreased to R16.8m (March 2016), excluding the earmarked sale of the Midrand Ulwazi Building.
At March 2016, the Group 1 Property Portfolio had a 2.0% GLA exposure to Edcon Holdings Ltd that occupied 8,053m2 (Soweto Dobsonville 2,085m2/9.0%, Randburg Square 3,185m2/7.8%, Pinetown Pine Crest 992m2/5.0% and Durban Phoenix Plaza 1,791m2/7.4%), and accounted for R846,186 of gross rental income as at March 2016.
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 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 four notch rating uplift on the national scale is deemed to be appropriate for the Transaction. Accordingly, GCR has affirmed a final, public long term rating of ‘AA+(ZA)’ to the Group 1 Notes, with a Stable outlook.
Structured Finance Analyst
+27 11 784 1771
+27 11 784 1771
Sector Head: Structured Finance Ratings
+27 11 784 1771
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Summary Structurally Enhanced Corporate Bonds Rating Criteria – revised Oct ’15;
Global Master Criteria for Rating Corporate Entities – Feb ’16;
Global Summary Criteria for Rating Property Funds – Apr ’15;
RATING LIMITATIONS AND DISCLAIMERS
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|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.|
|Capital||The sum of money that is used to generate proceeds.|
|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.|
|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.|
|Income||Money received, especially on a regular basis, for work or through investments.|
|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.|
|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.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Notching||A movement in ratings.|
|Proceeds||Funds from issuance of debt securities or sale of assets.|
|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.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate|
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 certificates of the Group 1 Property Portfolio.
- Large lease expiries of the Group 1 Property Portfolio per February and March 2016.
- Income and expenses per property per April 2016.
- Tenancy lease schedules per March 2016.
- Property risk grades.
- Forecast income and expenses per property as at April 2016.
- Vacancy and arrear levels per property as at March 2016.
- The Issuer’s Integrated Annual Report for the year ended 31 March 2015.