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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of B/Stable to Veritasi Homes & Properties Ltd. Scope has also assigned a first-time rating of S-4 to the short-term debt issued by Veritasi Homes & Properties Ltd.

Rating rationale

Veritasi’s business risk profile (assessed at B) reflects Scope’s view of the company’s small size, concentrated development portfolio and limited economies of scale. While these factors are a natural consequence of Veritasi’s recent establishment, they constrain the ability to cope with the cash flow volatility typical for homebuilders and to gain short-term visibility on core markets. Veritasi is expected to grow further in size, but for now its development pipeline is relatively small (1,800 units), limited by its need for external financing and the high cost of debt in Nigeria. Nonetheless, the potential for its expansion is high due to the housing shortage in Veritasi’s market of Lagos, a result of the growing population and rapid urbanization.

As all Veritasi’s projects are in Lagos, its future performance is fully correlated with that of the state and municipality. This low geographical diversification not only constrains the business risk profile but also limits the uplift on the asset quality due to the environmental risk of potential floodings (ESG factor: credit negative). Nonetheless, the group’s Premium Homes segment in the buoyant district of Lekki is credit positive as demand will continue to be high, supported by the construction of one of the largest housing projects in Africa, Eko Atlantic, one of the largest projects in Africa today. However, Scope’s assessment of the asset quality is negatively driven by the high country risk of investing in Nigeria and the high volatility of the macroeconomic environment. Lastly, the profitability margin remains low against peers’ but has improved in the last years. The Scope-adjusted EBITDA margin grew to 39% in Q3 2022 from 9% in 2018 and is expected to stay between 10-25%. Yet, the currently low 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 try 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 relatively high corruption plaguing Nigeria (ESG factor: credit negative). 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-) is partially mitigating 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 cost of funding in Nigeria (benchmark lending rate: 16.5%). However, debt protection is not expected to fall below 3x 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 concentrated pipeline 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 is less than adequate. The recently issued commercial paper is not sufficiently covered by the combination of cash flow and available cash. However, the holders of Series 3-5 commercial paper (NGN 6bn) issued by Veritasi bene-fit from an unconditional and irrevocable guarantee from Keystone Bank Limited.

Veritasi’s credit rating is also driven by the peer context. Against real estate development peers, Veritasi is smaller, less profitable, and less diversified, highlighting its limited experience given its recent establishment. Moreover, the compari-son 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 for Veritasi 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 more favourable external financing.

A negative rating action could occur if Scope-adjusted interest cover were sustained below 3.0x. A negative rating action could also occur if liquidity further deteriorated, pressured by cost overruns, customer payment delays or a weakening macroeconomic environment.

A positive rating action could be warranted if Veritasi improved its geographical diversification and significantly grew its pipeline while keeping Scope-adjusted debt/EBITDA below 2x, and if liquidity improved. An improvement in liquidity could occur through a shift from short-term to long-term debt financing, improved cash flow from operations or increased availability on committed credit lines.

Short-term debt rating

Scope has assigned a S-4 short term debt rating to the commercial paper issued by Veritasi Homes & Properties Ltd. The short-term rating benefits from good banking relationships and the expectation that the commercial paper will be easily re-issued given Veritasi’s good reputation. However, the short-term debt rating is constrained by the less-than-adequate liquidity. But Scope notes that holders of 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/or Outlooks, (General Corporate Rating Methodology, 15 July 2022; European Real Estate Rating Methodology, 25 January 2022), 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/or Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

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

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.
Scope Ratings provided the following Ancillary Services to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Credit Estimate

Conditions of use/exclusion of liability
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