Debt cited for Hyprop decision

Moody's says the strategy of using borrowing to fund offshore acquisitions is putting pressure on the mall owner’s balance sheet

Blue-chip mall owner Hyprop’s offshore acquisition strategy has come under fire, with Moody’s downgrading its rating, citing excessive debt levels.

Blue-chip mall owner Hyprop’s offshore acquisition strategy has come under fire, with Moody’s downgrading its credit rating citing excessive debt levels.

On Wednesday, the ratings agency said Hyprop, which owns some of SA’s highestrated malls including Hyde Park Corner, Canal Walk, the Clearwater and Rosebank Malls, and The Glen had undertaken too much debt since it first ventured into south eastern Europe in 2016. As a result Hyprop lost its investment grade status with the agency and gained a speculative grade rating in the short term.

However, Hyprop has disputed how Moody’s chooses to measure the property company’s debt level, saying it believed that the ratings agency had overestimated it.

Hyprop primarily uses debt to fund offshore transactions. Hyprop’s share price fell more than 5% after Moody’s downgraded the company’s credit rating from Baa3 to Ba1 with immediate effect.

A Baa3 rating implies Hyprop had adequate capacity to meet its financial commitments, while Ba1 means it is facing major ongoing uncertainties and exposure to adverse business, financial or economic conditions, which could lead to an inability to meet financial commitments.

But on a long-term basis Moody ’ s believed Hyprop was in a sound financial position. Moody’s lowered the long-term national scale issuer rating for Hyprop to Aa3.za from Aa1.za, meaning it believed Hyprop would successfully manage its debt over the long term.

Hyprop has invested in south eastern Europe through a joint venture called Hystead. It owns a 60% interest in the joint venture while private group PDI holds 40%. Hystead owns six malls in the region spread across Bulgaria, Macedonia, Serbia, Montenegro and Croatia.

Hyprop said in a statement on Sens that Moody’s method of measuring its loan-to-value was not applicable to Hyprop.

Moody’s estimated that the company’s loan-to-value, after consolidating Hystead into its financial statements, had increased to 41% at June 30 2018 from 33.4% in 2017. This was as a result of debt-funded acquisitions in Eastern Europe.

But Hyprop financial director Brett Till said the investment in Hystead was accounted for as a financial asset in terms of International Financial Reporting Standards (IFRS).

“Because of the terms of the shareholders agreement between Hyprop and PDI in relation to Hystead, in terms of IFRS Hyprop is not permitted to consolidate Hystead,” he said. But he said if Hystead’s debt was included, Hyprop’s loan-tovalue ratio would be 32.6%.

Chief investment officer at Bridge Fund Managers Ian Anderson said Hyprop’s offshore funding strategy was common albeit risky.

“Hyprop isn’t alone in using debt to fund offshore acquisitions. Growthpoint, Redefine and others do it too. I am surprised Moody’s just went ahead and downgraded Hyprop.”

HYPROP ISN’T ALONE IN USING DEBT TO FUND OFFSHORE ACQUISITIONS. I AM SURPRISED MOODY ’ S JUST WENT AHEAD AND DOWNGRADED