Johannesburg, 26 July 2017 — Global Credit Ratings (“GCR”) has accorded a final, public long-term credit rating of ‘AA+(ZA)’ with a Stable outlook to the second tranche of the following Group 1 Notes issued by Vukile Property Fund Limited (“Vukile” or “the Issuer”):
- R72m Senior Secured Notes, 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:
- R380m Senior Secured Notes, stock code VKE06, maturity 8 May 2018;
- R200m Senior Secured Notes, stock code VKE07, maturity 8 June 2020;
- R378m Senior Secured Notes, stock code VKE09, maturity 8 July 2020; and
- R122m Senior Secured Notes, stock code VKE10, maturity 8 July 2022.
The VKE10 Senior Secured Notes comprise of the first tranche totalling R122m and the second tranche totalling R72m that has the same terms as the first tranche. The Senior Secured Notes are jointly referred to as the Group 1 Notes and are secured by the Group 1 Property Portfolio.
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’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.R13.6bn at year-end FY17 (FY13: R7.7bn).
The current Group 1 Property Portfolio is a retail biased portfolio, measured in Open Market Valuation comprising of retail (82.0%), industrial (8.8%), mixed use (6.8%), residential (1.9%) and office/commercial (0.5%) properties. Group 1 Property Portfolio properties are valued every six months on a rotational basis by independent external valuers (Knight Frank and Quadrant Properties). GCR calculated the DMTN Loan to Value ratio covenant as 30.8%.
Vacancy rates (including development vacancy) as a percentage of rentals on Vukile’s Group 1 Property Portfolio have increased to 6.3% at June 2017 from 5.2% at March 2017. The Soweto Dobsonville Mall property is undergoing development, resultantly decreasing the actual vacancy rates to 4.5% at June 2017 and 4.4% at March 2017.
The property lease expiry profile of the Group 1 Property Portfolio (measured in GLA) is: 40.4% up to 2018, 15.6% in 2019, 9.9% in 2020, and 25.8% from 2021 onwards with the remaining 8.3% being either vacant or mothballed. The arrears for the Group 1 Property Portfolio have increased from R15.5m (September 2014) to R21.5m (February 2015), then decreased to R16.8m (March 2016), then increased to R25.6m (March 2017) and marginally declined to R25.3m (June 2017). GCR noticed one property, Randburg Square, which contributes the largest proportion of total arrears balance, although marginally below the stressed arrears assumption. Two other properties are in excess of the stressed arrears assumption with another edging closer to the stressed arrears assumption. This however has been factored in the potential recovery analysis, with the remaining 15 properties being well below the stressed assumptions. GCR noticed a slight improvement of certain arrear balances and therefore considered the arrears stresses to be adequate. At June 2017, the top 10 tenants of the Group 1 Property Portfolio contributed 41.5% in Gross Rentals with the same tenants occupying 38.2% 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 a 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 a final, public long-term credit rating of ‘AA+(ZA)’ to the second tranche of the VKE10 Group 1 Notes, with a Stable outlook. GCR concurrently affirmed the final, public long-term credit rating of ‘AA+(ZA)’ accorded to the existing Group 1 Notes (VKE06, VKE07, VKE09 and the first tranche of the VKE10), with a Stable outlook.
|n.a is not applicable.|
Senior Structured Finance Analyst
+27 11 784 1771
Sector Head: Corporate & Public Sector Debt Ratings
+27 11 784 1771
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Summary Structurally Enhanced Corporate Bonds Rating Criteria – Sep ’16
Global Master Criteria for Rating Corporate Entities – Feb ’17
Criteria for Rating Property Funds – Feb ’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.|
|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 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.|
|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.|
|Rating Outlook||A Rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|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.|
|Tranche||In a structured finance, a slice or portion of debt securities offered that is structured or grouped to resemble the same degree of risk associated with the underlying asset or with a similar degree of risk. A junior tranche has a higher degree of default risk than a senior tranche.|
|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.|
|Valuation||An assessment of the property value, with the value being compared to similar properties in the area.|
For a detailed glossary of terms utilised in this announcement please click here
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings was 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 ratings above were solicited by the Issuer and the Arranger of the Transaction; GCR has been compensated for the provision of the ratings.
The credit ratings have been disclosed to the Issuer and the Arranger with no contestation of the ratings.
The information received from the Arranger / Issuer:
- Applicable Pricing Supplements of the VKE10 Notes;
- An Audit Opinion from the auditors stating that the issuance complied with Commercial Paper Regulations;
- Compliance Certificate dated 24 July 2017;
- Property valuation documents of the Group 1 Property Portfolio;
- Large lease expiries of the Group 1 Property Portfolio per June 2017;
- Income and expenses per property per June 2017;
- Tenancy lease schedules per June 2017; and
- Property risk grades.
Vukile Property Fund Limited – Senior Secured Group 1 Notes, New Rating Accorded and Existing Ratings Affirmed