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Rating action

Scope Ratings GmbH (Scope) has today downgraded the issuer rating of Nigerian-based residential real estate developer Veritasi Homes & Properties Ltd to B-/Stable from B/Stable. Concurrently, Scope has affirmed Veritasi’s S-4 short-term debt rating. 

Rating rationale

The business risk profile, assessed at B- (one notch below the previous assessment) is increasingly constrained by the absence of geographical diversification. As all Veritasi’s projects are in Nigeria, its future performance is intertwined with that of the state and municipality of Lagos. Nigeria has been destabilised by the recent political elections and the failure of the government to address rising inflation. Therefore the issuer’s business presence in Nigeria only poses a high cash flow volatility risk. While the absence of geographical diversity and its small size are a natural consequence of Veritasi’s recent establishment, the issuer’s expectation to grow further and develop outside of Lagos and beyond Nigeria might be compromised by the high and rapidly growing cost of debt in Nigeria and the need for foreign financing. Nonetheless, the potential for expansion is high due to the housing shortage in Veritasi’s market of Lagos, a result of the growing population and rapid urbanisation. 

The reliance on one country’s macroeconomic headwinds not only constrains the operational environment but also limits the asset value due to the environmental risk of potential floodings (ESG factor: credit negative). The government’s answer to potential flooding in Lagos is currently inadequate and the failure to address the issue in the short-to-medium term will threaten asset values and their attractiveness to investors. The group’s premium homes segment in the dynamic district of Lekki is credit positive as demand continues to be high, supported by the construction of one of the largest housing projects in Africa, Eko Atlantic. Nonetheless, Scope considers that the city’s real estate market growth is too recent to be deemed stable and assets value are highly vulnerable. Lastly, profitability has reached its peak in 2022 with a 38% Scope-adjusted EBITDA margin, rising from 16% in 2021. But Scope expects the margin to remain highly volatile and range between 10% and 20% in the short-to-medium term, assuming a successful execution of the current pipeline. Nonetheless, an increase in profitability could occur if new projects were added to the current pipeline, combined with the persisting rise in property prices. Yet, the volatile profitability, in conjunction with the small scale, entails the risk that Veritasi may be unable to protect its market shares if larger or financially more powerful peers tried to establish a foothold in the company’s main markets by competing on price or offering incentives to customers. Pressure could also arise from the corruption plaguing Nigeria (ESG factor: credit negative) and the unstable macroeconomic environment. Scope consequently maintains that the ability of the group to control costs is relatively limited and that cost overruns are likely, pressuring profitability.

The company’s financial risk profile (assessed at BBB-, unchanged) partially mitigates the weak business risk profile. The current absence of significant debt has led to a healthy balance sheet, highlighted by an interest cover of historically well above 10x and Scope-adjusted debt/EBITDA of close to 1x. The push for stronger growth and the attendant need for external financing have driven down interest cover in 2022. The ratio will likely trend downward in the coming years because of the very high and increasing cost of funding in Nigeria (average cost of funding 21% and a new loan obtained in 2023 at 25% interest rate). However, debt protection is not expected to fall below 2x as Veritasi will likely keep debt low to avoid an excessive burden on its operating cash flow.

Even so, credit metrics could still quickly deteriorate as potential cash flow volatility due to the absence of diversification and the external financing needed to push growth could impair cash generation. Consequently, Scope has overweighted the business risk profile for the overall assessment.

Liquidity has improved and is expected to be adequate. The strong EBITDA and available cash are sufficient to cover short-term debt, an NGN 10bn commercial paper with two average yearly repayments NGN 5bn. The company’s business model, which allows the sale of property at the early development stage (serviced lands) ensures flexibility should liquidity issues quickly escalate. The holders of the Series 3-5 commercial paper (NGN 6bn) issued by Veritasi benefit from an unconditional and irrevocable guarantee from Keystone Bank Limited.

Veritasi’s credit rating is also driven by the peer context. Veritasi is smaller, less profitable, and less diversified than its real estate development peers, highlighting its limited experience. Moreover, the comparison reflects Scope’s view that the company is exposed to risks that are independent from management’s control given the country’s weak governance, political instability, lack of rule of law, low institutional and regulatory quality and control of corruption, and the high volatility of the macroeconomy of a developing country including soaring interest rates amid high inflation and high external vulnerabilities.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Outlook is Stable and incorporates Scope’s view that the company will successfully execute its three-year pipeline while maintaining low leverage and moderate interest coverage. Furthermore, the Outlook reflects Scope’s expectation that the issuer will likely remain small until it can gain favourable external financing.

A positive rating action is remote but could be warranted if Veritasi improved its geographical diversification, thereby reducing dependency towards a high-risk country, and significantly grew its pipeline while keeping Scope-adjusted debt/EBITDA at below 2x. It could also be triggered by a significantly improved economic and political environment or better governance in the Republic of Nigeria.

A negative rating action could result if the Scope-adjusted interest cover were sustained below 1.0x. A negative rating action could also occur if liquidity deteriorated. Both could be triggered by cost overruns amid inflationary pressures, customer payment delays due to a sharp deterioration in affordability, a sharp correction in property prices in the Lagos region, or a weakening macroeconomic and/or political environment that could lead to civil unrest.

Short-term debt rating

Scope has affirmed the S-4 short term debt rating to the commercial paper issued by Veritasi Homes & Properties Ltd. The short-term debt rating benefits from good banking relationships and the expectation that the commercial paper will be easily reissued given Veritasi’s good reputation. Scope notes that holders of the Series 3-5 commercial paper (NGN 6bn) issued by Veritasi benefit from an unconditional and irrevocable guarantee from Keystone Bank Limited.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and Outlook, (General Corporate Rating Methodology, 15 July 2022; European Real Estate Rating Methodology, 25 January 2023), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook are UK-endorsed.
Lead analyst: Claudia Aquino, Associate Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 22 December 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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