GCR Maintains Rating Watch on Tower Funding Plc’s Series 1 Tranche A and Tranche B Bonds Ratings.

11 Apr 2017 In Rating Notifications

GCR Maintains Rating Watch on Tower Funding Plc’s Series 1 Tranche A and Tranche B Bonds Ratings.

Lagos Nigeria, 10 April 2017—Global Credit Ratings has affirmed the national scale ratings assigned to Tower Funding Plc’s Medium Term Note Programme as follows:

Series 1 Tranche A: CCC(NG)(sf)
Series 1 Tranche B: B(NG)(sf)

The ratings have been maintained on ‘Rating Watch’ and are valid until August 2017.

RATING RATIONALE

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

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

Tower’s weak performances over the review period, as well as heightened financial challenges in recent years, have resulted in the successive downgrading of its ratings. However, the Group’s broad market presence and strong brand awareness, supported by the robust manufacturing infrastructure, does support tentative prospects for a recovery.

The Group has recorded substantial earnings losses over the years due to sustained pressure arising from high production costs, uncompetitive import duties, security challenges in Northern Nigeria, and foreign currency illiquidity in recent times. In this regard, revenue declined steadily from N38.6bn in FY12, to N17.9bn in FY15, before rising to N26.6bn based on the unaudited management results in FY16. Over the review period, operating profit has been eroded by high interest cost, with Tower’s pre-tax loss rising almost 3-fold to N6.6bn in FY16 (FY15: N2.5bn).

Due to the recurring operating losses, core share capital has been eroded, and Tower’s solvency impaired, with the positive equity entirely represented by property revaluation reserve.The huge debt burden of N26.4bn at FY16 is considered unsustainable and has given rise to excessive gearing metrics, with net debt to EBITDA registered at 1,001% at FY16. Similarly, interest coverage has been negligible. While management’s efforts towards reducing the interest burden are noted, it is unlikely that the excessive debt burden can be reduced through ordinary operations. Thus, a substantial capital injection is required to restore the business to a financially solvent position and ensure its going concern status.

The Series 1 Tranche A and B bonds are secured by partial guarantee from GuarantCo, which has an international rating of AA- by Fitch Ratings. As the Series 1 Tranche A Bonds only benefit from 33% guarantee of the outstanding principal, no uplift is applicable. While the Series 1 Tranche B Bonds do benefit from a guarantee of 100% of the outstanding principal, the rating uplift has been constrained by the extent to which Tower Group’s unsecured stand-alone credit quality has deteriorated of late.

GCR again noted in the Trustees’ report of 31 January 2017 that the Minimum Reserve Account and Payment Account have been depleted, in breach of the Trust Deed. A similar issue was flagged in GCR’s September 2016 review. Although Tower has made all interest and principal payments up to September 2016, the obligations due on 9 March 2017 had yet to be paid. The outstanding principal obligation on the Tranche A and B bonds are N1,452m and N400m respectively.

The ‘Rating Watch’ reflects GCR’s concerns on the sustainability of Tower’s business in the short to medium term, and its ability to meet its debt service obligations. Accordingly, the credit rating will be reviewed again within six months.

NATIONAL SCALE RATINGS HISTORY

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

Last rating (September 2016)
Series 1 Tranche A: CCC(NG)(sf)
Series 1 Tranche B: B(NG)(sf)
Outlook: Rating Watch

ANALYTICAL CONTACTS

Primary Analysts
Femi Atere/Adekemi Adebambo
Credit Analyst/Senior Credit Analyst
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Committee Chairperson
Dave King
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Corporate Entities, updated February 2017
Global Structurally Enhanced Corporate Bonds Rating Criteria, September 2016
Glossary of terms/ratios, February 2017
Tower Rating Reports 2010-2016


RATING LIMITATIONS AND DISCLAIMERS

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/RATINGS-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 AT WWW.GLOBALRATINGS.COM.NG

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 ratings are valid until August 2017.

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 unaudited management accounts to 31 December 2016;
• Four years comparative numbers; and
• Quarterly Trustees Bond Performance report as at March 2017

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 HTTP://GLOBALRATINGS.COM.NG/RATINGS-INFO/RATINGS-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.

 

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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