GCR downgrades ABC Holdings Limited’s rating to B(BW); Outlook Negative.

11 Dec 2018 In Rating Notifications

GCR downgrades ABC Holdings Limited’s rating to B(BW); Outlook Negative.

Johannesburg, 11 December 2018—Global Credit Ratings has downgraded the long term national scale rating of ABC Holdings Limited to B(BW) from BB+(BW) and the short term national scale rating to B(BW) from A3(BW); with outlook accorded as Negative.

 

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to ABC Holdings Limited (“ABCH”, “the group”) based on the group’s very high double leverage, weak liquidity and poor profitability of the holding company. These are exacerbated by structural subordination to its subsidiaries coupled with modest consolidated capitalisation and profitability of the consolidated underlying subsidiaries. The ratings are supported by no immediate short-term liquidity risks, the expectation that the partial sale of the Botswana entity will lower double leverage and the geographic diversification of the subsidiaries. The Negative outlook reflects our opinion that ABCH’s credit profile will likely remain vulnerable over the rating horizon, despite an anticipated easing in the group’s double leverage and liquidity risk in the short term, following the partial sale of one of its subsidiaries.

At FY17, the double leverage of the holding company was a significant 8.9x. As a result, net debt is 7.7x that of shareholders equity and 8.5x that of liquid assets at FY17. Ultimately, it is our opinion that these levels of leverage increase the vulnerability of the company over the long term.  Positively, the partial sale of the Botswana subsidiary (arguably the groups flagship bank) is expected to reduced double leverage materially. Furthermore, supportive funders have reduced short to medium term payment risk by encompassing two-year grace periods into the loans. Nevertheless, we still believe the long-term payment of debt is reliant on ongoing shareholder support, funders support, and the performance of group subsidiaries.

GCR considers ABCH to be of significant importance to its parent, Atlas Mara. We have witnessed strong willingness to support through a track record of capital and liquidity injections. However, we do not factor support into the ratings as we cannot judge the capacity of its parent. We also have doubts regarding the ability of the subsidiaries to support this quantum of debt through dividends. We have estimated the subsidiaries have a combined USD100-USD120m capital excess (the amount above regulatory minimum) at FY17, which represents one third of the debt stock at the holding company level. On a group basis, adjusted financial leverage at FY17 is weak at 3.33%, and still the return on assets is only 3%. This partially reflects the fact that two of the five subsidiaries are loss making, and only the Botswana based subsidiary makes a double-digit return on equity. Stress across the group can be best illustrated by the breach of two covenants across the group in the past 12 months.

We will bring down the ratings in the short term if the funds garnered from the Initial Public Offering (“IPO”) of BancABC Botswana are not capitalised and subsequently bring down double leverage materially, or if funds are not invested in liquid assets to mitigate the liquidity risk facing the entity. Over the longer term, if the non-operating holding company does not build up liquid assets, improve profitability and reduce double leverage materially, we will lower the ratings incrementally as the end of the grace periods arrive.  We see no upside potential in the rating, outside a material equity raise.

 

NATIONAL SCALE RATINGS HISTORY

   
Initial rating (December 2004)   Last rating (November 2017)
Long-term: BBB-(BW); Short-term: A3(BW)   Long-term: BB+(BW); Short-term: A3(BW)
Outlook: Negative   Outlook: Stable
     
ANALYTICAL CONTACTS    
Primary Analyst   Secondary Analyst
Simbarake Chimutanda   Nyasha Chikwengo
Credit Analyst   Credit Analyst
(011)784-1771   (011) 784-1771
simbarakec@globalratings.net   .(JavaScript must be enabled to view this email address)
     
Committee Chairperson    
Matthew Pirnie    
Sector Head: Financial Institution Ratings    
(011) 784-1771    
matthewp@globalratings.net    

 

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017

ABC Holdings Limited rating reports (2004-18)

 

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: http://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK:  http://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT http://GLOBALRATINGS.NET.

 

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.

ABC Holdings Limited participated in the rating process via face-to-face management meetings and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings have been disclosed to ABC Holdings Limited.

The information received from ABC Holdings Limited and other reliable third parties to accord the credit ratings included:

  • Audited financial results as at 31 December 2017 (and four years of comparative numbers);
  • Unaudited financial results up to 30 June 2018;
  • Budgeted financial statements for 2018 and
  • A breakdown of facilities available and related counterparties.

The ratings above were solicited by, or on behalf of, ABC Holdings Limited and therefore GCR has been compensated for the provision of the ratings.

 

 

 

 

 

 

 

 

 

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS SECTOR GLOSSARY

Asset A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Asset Quality Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.
Audit Report A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).
Budget Financial plan that serves as an estimate of future cost, revenues or both.
Capital The sum of money that is invested to generate proceeds.
Capital Adequacy A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.
Corporate Governance Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.
Credit Rating Agency An entity that provides credit rating services.
Credit Risk The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.
Debt An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Equity Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
Financial Institution An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.
Financial Statements Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.
Impairment Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.
Liquid Assets Assets, generally of a short term, that can be converted into cash.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. 
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
Long-Term Not current; ordinarily more than one year.
Long-Term Rating Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.
Margin The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
National Scale Rating Provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.
Performing Loan A loan is said to be performing if the borrower is paying the interest on it on a timely basis.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Rating Outlook Indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
Risk Management Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.
Securities Various instruments used in the capital market to raise funds.
Security An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
Short-Term Current; ordinarily less than one year.
Short-Term Rating An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.
Tier 2 Capital Secondary capital is mainly made up of subordinated debt, portfolio impairment and 50% of any revaluation reserves and other specified regulatory deductions.

For a detailed glossary of terms, please click here.

 

 

 

 

 

ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GLOBALRATINGS.NET/UNDERSTANDINGRATINGS. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GLOBALRATINGS.NET/RATINGSINFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE UNDERSTANDING RATINGS SECTION OF THIS SITE.

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