Moody’s downgrades Acorn issuer rating, citing potential risks

Moody’s Investors Service has downgraded the creditworthiness of student housing developer Acorn Holdings to negative, indicating potential financial challenges ahead.

“This downgrade impacts the ratings on the Sh5.7 billion backed senior secured medium-term note programme and the backed senior secured ratings of B1/Aa2.ke on the drawdowns under the MTN Programme of Acorn Project (Two) LLP (the Issuer). The decision concludes a review for downgrade initiated on May 16, 2023,” the ratings agency concluded.

Secured Notes

Acorn is a special purpose, limited liability partnership established under Kenyan laws, issues fixed-rate, senior secured Notes due in 2024 to part-fund the construction of purpose-built student accommodation (PBSA) buildings in Nairobi and associated transaction costs.

The Notes’ creditworthiness is partially bolstered by a partial guarantee of principal and interest provided by GuarantCo Limited. This guarantee aims to enhance the recovery of Noteholders in the event of an Issuer default.  “While it offers some protection, a portion of the Notes still remains exposed to the credit risk of the Issuer,” said Moody’s.

Moody’s justified the rating action by citing the recent confirmation of the Government of Kenya’s B3 rating with a negative outlook. “The Issuer’s ratings were affected by factors such as the progress in constructing its PBSA portfolio, quicker-than-expected room occupancy growth, the successful sale of two assets leading to deleveraging, and evidence supporting loan-to-value ratios below the 75 per cent covenant in the financing documentation,” the agency said.

However, despite these positive aspects, Moody’s acknowledged that the issuer’s standalone credit profile remains constrained by the pressures at the sovereign(government) level due to the interlinked nature between the sovereign and local issuers. The debt ratings for the Issuer also reflect several credit strengths, including GuarantCo’s partial guarantee, favourable supply/demand characteristics in Nairobi’s undersupplied student accommodation market.