Property firms in ratings squeeze
Moody’s downgrading of Hyprop sends warning to SA companies over debt
The strategy where many of South African property companies use debt to fund their expansions abroad, is under fire, with ratings agency Moody's making an example of east Europe invested Hyprop Investments by downgrading its credit rating citing excessive debt levels.
Moody's said Hyprop, which owns some of South Africa’s highest rated 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 shortterm.
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 its financial commitments.
Moody's adverse economic conditions or changing circumstances were more likely to lead to a weakened capacity of the company to meet its financial commitments, according to Moody’s’ rating system.
Ba1 meant Hyprop was less vulnerable in the near-term than other lower-rated “obligors” or companies.
However, it was facing major ongoing uncertainties and exposure to adverse business, financial, or economic conditions which could lead to an inadequate capacity to meet its financial commitments.
But on a long-term basis, Moody's believed Hyprop was in a sound financial position. Moody's also lowered the longterm national scale issuer rating for Hyprop to Aa3.za from Aa1.za, meaning on a long-term basis Moody’s still believed Hyprop would successfully manage its debt over the longterm.
Companies rated Aa1.za, Aa2.za and Aaa3.za all sit in the same band under Moody’s long-term credit ratings system.
The band is defined: “An obligor has capacity to meet its financial commitments. It differs from the highest-rated obligors only to a small degree”. Hyprop has invested in the south eastern Europe through a joint venture called Hystead. It owns a 60% interest in the JV while private group PDI holds 40%.
Hyprop had intended to list Hystead separately but abandoned this plan after it did not foresee enough interest from institutional investors.
Hystead owns six malls in the region spread across Bulgaria, Macedonia, Serbia, Montenegro and Croatia.
Hyprop said in a statement on the JSE’s Stock Exchange News Service that Moody’s method of measuring its loanto-value (LTV) was not applicable to Hyprop.
Moody’s estimated that the company’s LTV, 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’s FD, 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 when calculating Hyprop’s LTV, the ratio would be 32.6%.