Cytonn Receives a Maiden Rating By GCR For Good Corporate Governance

Cytonn Investments Management Public Limited Company has moved another level after receiving a rating from Global Credit Rating agency (GCR).

Cytonn has now been accorded with BB (KE) and B (KE) in both long-term and short-term with a stable outlook.

“Although Cytonn has a comprehensive strategy outlining the rapid growth of assets under management, its main exposure is to the development and sale of residential and mixed-use properties, with plans to increase the project pipeline from 82.7 billion shillings at 1H FY17 (FY16: KES46.7bn) to 112.2 billion shillings by 3Q FY18. Accordingly, the ratings take account of the risks of identifying, funding and executing such developments, and Cytonn’s ability to effectively recycle capital while consistently generating targeted returns for investors,” said the report released by the South African-based agency. Cytonn Investments has also been awarded a commercial paper rating of B (KE) with an extension to September 30 in 2018.

According to Global Credit Ratings, the ratings are currently constrained by the short track record. The agency notes the rigor of the governance structures, comprehensive risk protocols and the quality of management. Cognizance is also taken of the partnership with global private equity firm Taaleri Plc on the first two developments, as well as relationships being developed with strong financial institutions. While the associated funding is moderate given the aggressive growth forecasts, this is indicative of Cytonn’s ability to secure support from major institutional investors/funders.

Kenya’s real estate sector has been on an upward trend in the recent years. According to the accrediting agency, “the real estate model is built on extensive due diligence, research and market knowledge, which allows management to unlock value from partnerships with landowners.”

Cytonn plans to pre-sell 10-15% of a project off-plan and a large proportion of the remainder during construction to mitigate capital risk. Each project is housed in a separate special purpose vehicle (“SPV”), which is set up as a limited liability partnership and funded using equity, mezzanine finance and bank debt at 20:20:60 split. Cash Management Solutions (“CMS”), the group’s funding vehicle, invests in the developments via one-year rolling investments (that have historically yielded a return of 21% p.a.).

Revenues mostly result from sales and management fees, and as such, growth is contingent on timely and successful project execution (which could be curtailed by regulatory, construction and socio-political factors) as well as strong project uptake, while margin and free cash flow variability could be exacerbated by market volatility. This could restrict planned project returns, which range from 20-30%.

The rating came two days before the established real estate giant launched a 20-billion Cytonn Towers which is expected to be Nairobi’s premiere.