JCR-VIS Credit Rating Company Ltd (JCR-VIS) has assigned medium to long term entity ratings of BBB+ (Triple B Plus) and short-term entity rating of A-3 (A Three) to Pakistan Hotel Developers Ltd (PHDL).
The proposed TFCs of Rs 1.2 billion of PHDL have been assigned a preliminary medium to long term rating of A- (Single A Minus), to be converted into final ratings on review of relevant legal documents. The outlook on the medium to long-term ratings is Stable.
The ratings are primarily based on the historically conservative stance of the sponsors with respect to financial risk with low level of gearing and leverage levels maintained in its existing operations.
This has supported the company through the cyclical downturn experienced by the hotel industry at large prior to FY2003-04 when cash flow generation was quite strained while also leaving their strategically located Karachi property largely unencumbered.
The company is currently maintaining high occupancy rates in line with the overall demand in the hotel industry despite a substantial increase in number of available rooms at the Karachi hotel.
This is reflected in the strong results posted by the company up to 3Q FY2006. The company is now planning to diversify its operations through development of a new property in Lahore which will include a shopping mall, an office tower and a four-star hotel. JCR-VIS has also taken into account the proposed equity injection of Rs 270m expected in 1Q FY2007.
The TFC issue proceeds will be utilised for acquisition of land in Lahore for the above-mentioned project with mark-up capped at 18 per annum. PHDL has already entered into a sale agreement and made the requisite down payment for this land, which is very centrally located in Lahore. The ratings have taken into account the risks associated with financing such project (legal/regulatory/construction etc) and the inherent cyclicality of hotel industry itself.
In order to mitigate the above-mentioned risks, certain covenants have been agreed which have been given due weightage while assigning the ratings. The proceeds from the TFCs will be deposited in a specific disbursement account and shall be only released by the Trustee for the payment of acquisition price of the specified land. PHDL will arrange a standby line of credit of Rs 400m from a financial institution with a credit rating of 'A' or above.
This line will be invoked if PHDL is unable to obtain necessary permissions to commence bookings within a specified timeframe to partially prepay the TFC issue and to meet any shortfall in the debt servicing requirements.
Separate escrow accounts will be established through which all revenues from operations and from sale of shops and offices will be routed. The Trustee will have control over this account and will transfer 1/6th of the next redemption amount from the escrow to the debt servicing account at the beginning of each month. Any excess in operational revenues may be utilised by the issuer while the excess in the escrow account for capital receipts will only be utilised for capital expenditure and for debt servicing of the TFCs.
The issuer will provide an annual capital expenditure budget (July to June) to the Trustee and the Trustee will disburse the same from this account after due verification.
Overruns upto Rs 100m per annum over the initial budget are allowed, while any further overruns over the specified limit will require approval of the Trustee. In addition, the TFCs will be secured by a first pari passu charge on all present and future fixed assets of PHDL.