Announcements

Adcorp Holdings Limited Group 1 Notes – Ratings Affirmed

Johannesburg, 26 May 2016 — Global Credit Ratings (‘GCR’) has affirmed the final, public long term credit rating of ‘A(ZA)’ with a ‘Stable’ Outlook, accorded to the following Senior Secured Notes issued by Adcorp Holdings Limited:

R400m 5 Year Secured Term Notes, stock code ADCB01; maturing 8 March 2018 (“R400m 5 Year Secured Term Notes”);
R100m 3 Year Secured Term Notes, stock code ADCB02; maturing 31 July 2016 (“R100m 3 Year Secured Term Notes”);
R209m 3 Year Secured Term Notes, stock code ADCB04; maturing 27 November 2017 (“R209m 3 Year Secured Term Notes”); and
R100m 3 Year Secured Term Notes, stock code ADCB05; maturing 4 December 2018 (“R100m 3 Year Secured Term Notes”).

The Secured Term Notes are collectively referred to as the Group 1 Notes.

RATING RATIONALE

Adcorp Holdings Limited is the only listed human resources group in South Africa, offering placements over a wide range of industries. The Issuer simplified the security structure in November 2015 to introduce a Security SPV which acts in favour of the Group 1 Noteholders. The Issuer’s bank accounts and trade receivables, amongst others, were ceded to the Security SPV in accordance with the Security Cession Agreement as collateral for the due, proper and punctual payment of the obligations to the Group 1 Noteholders and overdraft facilities providers (FirstRand Bank Limited: R190m and Absa Bank Limited: R170m), who rank pari passu and share pro rata in terms of the security agreement.

Adcorp’s ceded debtors book grew by nearly a third in 2015, reporting a value of R1.58bn in December 2015 (January 2015: R1.19bn), albeit being reported slightly lower at R1.45bn as at 31 March 2016. Out of the ceded debtors’ book, 90.2% of the receivables were defined as good debtors (up to 90 days in arrears).

The Debtors Cover Ratio was reported as 1.62x (covenant: ≥1.5), whilst the EBITDA Interest Cover Ratio was reported as 4.81x (covenant: ≥4) as at 30 April 2016. All unsecured debt is excluded from the Debtors Cover Ratio calculation. GCR noted that although the Debtors Cover Ratio was very close to the covenant limit, this was in line with management strategy and may partly have been influenced by seasonally difficult collections around holiday seasons. GCR will continue to monitor the covenants and a breach in the covenant limits may warrant rating action.

The rating of the Group 1 Notes is derived by applying a notching approach, starting from the senior unsecured long term corporate credit rating of the Issuer. The rating incorporates the recoveries from the ceded trade receivables and relates to the ultimate (as opposed to timely, akin to a loss severity rating, which is a function of probability of default and loss severity) repayment of interest and principal. Based on the expected “Superior Recovery Prospects” on the Group 1 Notes in an enforcement scenario, a rating uplift of three national scale notches has been deemed appropriate for this transaction.

RATINGS HISTORY

Stock code
Initial Rating
Long Term Rating
Short Term Rating
Outlook
ADCB01
8 March 2013
A(ZA)
n.a
Stable
ADCB02
11 October 2013
A(ZA)
n.a
Stable
ADCB04
27 November 2014
A(ZA)
n.a
Stable
ADCB05
4 December 2015
A(ZA)
n.a
Stable
       
Stock code
Last Rating
Long Term Rating
Short Term Rating
Outlook
ADCB01
26 February 2016
A(ZA)
n.a
Stable
ADCB02
26 February 2016
A(ZA)
n.a
Stable
ADCB04
26 February 2016
A(ZA)
n.a
Stable
ADCB05
26 February 2016
A(ZA)
n.a
Stable

ANALYTICAL CONTACTS

Tinashe Mujuru

Junior Analyst

+27 11 784 1771

tinashem@globalratings.net

Corné Els

Structured Finance Analyst

+27 11 784 1771

cornee@globalratings.net

Committee Chairman

Emma-Jane Fulcher

Sector Head: Structured Finance Ratings

+27 11 784 1771

fulcher@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Structurally Enhanced Corporate Bonds Rating Criteria – Oct ’15;

Adcorp Holdings Limited Group 1 Notes New Issuance Report – Dec ’15;

Adcorp Holdings Limited Group 1 Notes Surveillance Report – Feb ’16;

Global Criteria for Rating Corporate Entities – Feb ’16; and

Adcorp Holdings Limited Corporate Rating Report – Nov ’15

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/RATING-SCALES-DEFINITIONS. 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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S STRUCTURED FINANCE GLOSSARY

Agreement A negotiated and usually legally enforceable understanding between two or more legally competent parties.
Arranger Usually an Investment bank that advises and constructs a transaction and acts as a conduit between the transaction parties: Client, Issuer, Credit Rating Agency, Investors, Legal Counsel and Servicers.
Asset An item with economic value that an entity owns or controls.
Bond A long term debt instrument issued by either: a company, institution or the government to raise funds.
Claim A formal request or demand.
Collateral An asset pledged as security in event of default.
Covenant A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.
Credit A contractual agreement in which a borrower receives something of value now, and agrees to repay the lender at some date in the future, generally with interest. The term also refers to the borrowing capacity of an individual or company
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
Debt An obligation to repay a sum of money.
Debtor The party indebted or the person making repayments for its borrowings.
Default A default occurs when: 1.) The Borrower is unable to repay its debt obligations in full; 2.) A credit-loss event such as charge-off, specific provision or distressed restructuring involving the forgiveness or postponement of obligations; 3.) The borrower is past due more than X days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors.
EBITDA EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.
Income Money received, especially on a regular basis, for work or through investments.
Issuer The party indebted or the person making repayments for its borrowings.
Long Term Rating A 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.
Loss A tangible or intangible, financial or non-financial loss of economic value.
Market An assessment of the property value, with the value being compared to similar properties in the area.
Notching A movement in ratings.
Noteholder Investor of capital market securities.
Obligation The title given to the legal relationship that exists between parties to an agreement when they acquire personal rights against each other for entitlement to perform.
Pari Passu Side by side; at the same rate or on an equal footing. Securities issued with a pari passu clause have rights and privileges that are equivalent to those of existing securities of the same class.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
Receivables General term for economic benefit derived from an asset.
Recovery The action or process of regaining possession or control of something lost. To recoup losses.
Redemption The repurchase of a bond at maturity by the issuer.
Repayment Payment made to honour obligations in regards to a credit agreement in the following credited order: 3.) Satisfy the due or unpaid interest charges; 4.) Satisfy the due or unpaid fees or charges; and 5.) To reduce the amount of the principal debt.
Securitatem debiti Cession to secure debt where the cession of a personal right is affected as security for a debt.
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.
Security Agreement A negotiated and usually legally enforceable understanding between two or more legally competent parties that specifies the collateral held as security.
Security SPV A Special Purpose Vehicle that has been created to realise and hold the security of the performance of the obligations of the Issuer that sold its assets to the Security SPV.
Senior A security that has a higher repayment priority than junior securities.
Servicer A transaction appointed agent that performs the servicing of mortgage loans, loan or obligations.
Servicing The calculation of interest and repayments, collection of repayments, advancing of loans, foreclose procedures, maintaining records and seeing that the proceeds of each loan are passed on to the respective party.
Short Term Rating A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.
Special Purpose Vehicle/SPV An entity that is created to fulfil specific objectives. Normally insolvency remote and created to isolate financial risk.
Stock Code A unique code allocated to a publicly listed security.
Structured Finance A method of raising funds in the capital markets. A Structured Finance transaction is established to accomplish certain funding objectives whist reducing risk.
Trade Receivables A legally enforceable claim for payment to a business by its customer or clients for goods supplied and or services rendered in execution of the customer’s order.
Transaction A transaction that enables an Issuer to issue debt securities in the capital markets. A debt issuance programme that allows an Issuer the continued and flexible issuance of several types of securities in accordance with the programme terms and conditions.
Valuation An assessment of the property value, with the value being compared to similar properties in the area.
Working Capital Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.


SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

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

The rating above was solicited by the Arranger and Issuer of the Transaction; GCR has been compensated for the provision of the rating.

The credit rating has been disclosed to the Arranger and Issuer with no contestation of the rating.

The information received from the Arranger / Issuer:

  • Historical trade receivables data of the total and ceded portfolio up to March 2016;
  • Debtors ageing statistics for the abovementioned period;
  • Provisions for bad debts and actual write-offs from provisions for the abovementioned period;
  • Monthly collections for the abovementioned period;
  • Audited financial statements of the Issuer for the year ended 29 February 2016;
  • Management accounts for the month ended 31 March 2016;
  • Final, signed and executed Transaction documents;
  • Compliance Certificates up to 30 April 2016; and
  • Adcorp Legal Report as at March 2016 and the total legal collections due.

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