GCR Downgrades Tower Funding Plc’s Series 1 Tranche A and Tranche B Bonds

22 Dec 2015 In Rating Notifications

GCR Downgrades Tower Funding Plc’s Series 1 Tranche A and Tranche B Bonds

Lagos, 22 December 2015—Global Credit Ratings has downgraded Tower Funding Plc’s Medium Term Note Programme’s national scale ratings to:

Series 1 Tranche A: B-(NG)(SF)
Series 1 Tranche B: BB+(NG)(SF)

The ratings have been placed on ‘Rating Watch’ and expire in June 2016.

RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Tower Funding Plc’s Medium Term Note Programme based on the following key criteria:

Tower Funding Plc (“the Issuer”) is a funding vehicle owned by the Tower Companies, who are jointly and severally liable for the bonds. The Tower Companies comprise Tower Aluminium (Nigeria) Plc (“Tower Aluminium”), Kolorkote Nigeria Limited (“Kolorkote”), Asaba Aluminium Company Limited (“Asaba”), Borno Aluminium Limited (“Borno”), Queensway Aluminium Limited (“Queensway”), and Tower Roofing Systems Limited (“TRSL”).

While the Tower Companies enjoy dominant domestic market shares in most of their product lines, and a robust manufacturing infrastructure which cannot be easily replicated, Tower’s competitive position has been sharply eroded by an influx of cheaper Chinese imports, which had adversely affected its pricing power in recent years. In addition, elevated production costs and uncompetitive import duties adversely impacted revenue and earnings over the review period, while more recently security concerns have seen volumes in certain regions decline, resulting in sustained underperformance relative to budget. Tower’s revenue thus declined 27% to N27.7bn in F14, lagging the revised budget by 35.5%. All the companies reported weaker revenue on the back of lower roofing income. Operating profit had been completely eroded by the high interest cost, with Tower posting pre-tax losses of N2.9bn and N1.7bn in F14 and 3Q F15 respectively. As such, net interest coverage has remained below 1x since F09, ending 3Q F15 at just 0.4x (F14: 0.3x).

Recurring losses have eroded equity, with total shareholders’ funds reported at N8.8bn at FYE14 (of which property revaluation reserve stood at N10.8bn). The already huge debt burden increased further to N25.8bn at FYE14 and N26.1bn at 3Q F15, with net debt to EBITDA having registered above 1,300% since FYE13. Excessive debt continues to impact the viability of the business and has resulted in the ratings downgrades over the past few years. Based on these factors, GCR downgraded the theoretical long term corporate credit rating of the Tower Companies by two notches to B-(NG) in December 2015 (December 2014: B+(NG)). Notwithstanding efforts to reduce the interest burden, Tower requires a substantial capital injection to ease gearing and restore the business to a financially sustainable position

Both Bond Tranches benefit from a partial Guarantee provided by GuarantCo, albeit to differing extents. GuarantCo is a Mauritius incorporated institution whose majority funders and ultimate shareholders comprise one ‘AA+’ and three ‘AAA’ internationally rated European government entities.  In July 2015, Fitch ratings affirmed Guarantco’s Insurer Financial Strength rating of AA- while Moody also affirmed Guarantco’s Issuer rating of A1.

 

The rating of the Bonds is derived by applying a notching up approach, starting from the notional long term corporate credit rating of the Tower Companies. Outstanding principal on both Bonds combined was N2.8bn as at September 2015.

N3.63bn Series 1 Tranche A Bond: Based on GCR’s secured bond methodology, the calculated overall recovery rate of 32.76% is much lower than the range in which an uplift can be accorded. In addition, Tower breached the Trust Deed’s requirement to replenish the Minimum Reserve Account (“MRA”) to cover the semi-annual principal and coupon payment on the Series 1 Tranche A Bonds. As such, the MRA had a shortfall of around N510m as at the review date. Therefore, the Series 1 Tranche A Issue has been downgraded to B-(NG)(SF), corresponding with the unsecured notional corporate rating.

N1bn Series 1 Tranche B Bond: Given the mechanics of the guarantee, whereby 100% of the principal is guaranteed, recovery prospects of 83.62% are considered “Superior”. Based on GCR’s methodology, this enables a maximum 5 notch rating uplift on Tower’s B-(NG) long term unsecured corporate credit rating. While the high credit quality of the Guarantor has been taken into account, a higher rating uplift has been constrained by the extent to which Tower’s unsecured stand-alone credit quality has deteriorated of late. As such, the Series 1 Tranche B Bond rating has been downgraded to BB+(NG)(sf).


NATIONAL SCALE RATINGS HISTORY
Initial rating (October 2011)
Series 1 Tranche A: BBB(NG)(sf)
Outlook: Stable
Series 1 Tranche B: AA-(NG)(sf)
Outlook: Stable

Last rating (December 2014)
Series 1 Tranche A: B+(NG)(sf)
Outlook: Evolving
Series 1 Tranche B: A(NG)(sf)
Outlook: Evolving


Credit Analysts
Adekemi Adebambo/Femi Atere
.(JavaScript must be enabled to view this email address)
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Lagos
+23 41 462 2545


Committee Chairperson
Dave King
Chairman
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, February 2015
Global Structurally Enhanced Corporate Bonds Criteria, October 2015
Tower Funding Plc Rating Reports, 2011 to 2014
Glossary of terms (February 2015)


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.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK:HTTP://GLOBALRATINGS.COM.NG/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.COM.NG


SALIENT FEATURES

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 ratings expire in June 2016.

Tower Funding Plc participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit rating/s has been disclosed to Tower Funding Plc with no contestation of the rating.

The information received from Tower Funding Plc and other reliable third parties to accord the credit rating included:
• the consolidated 2014 audited annual financial statements for the Tower companies and separate 2014 audited accounts for Kolorkote, Queensway, Asaba, Borno and TRSL,
• 2015 earnings and balance sheet budget,
• year to date management accounts for the 9 months to 30 September 2015,
• a schedule of credit facilities available and related counterparties and
• quarterly Trustees’ Bond Performance report for 2015.
• information specific to the Tower Companies was also received.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

 

 

 

 

 

 

 

 

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GLOBALRATINGS.COM.NG/RATINGS-INFO. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES.  GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE

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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.COM.NG/UNDERSTANDING-RATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATING-SCALES-DEFINITIONS. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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