Johannesburg, 25 August 2016 — Global Credit Ratings (‘GCR’) has affirmed the final, public long-term credit ratings of ‘A(ZA)’ with a ‘Stable’ Outlook, accorded to the following Senior Secured Notes issued by Adcorp Holdings Limited (‘Adcorp’):
|●||R400m 5 Year Secured Term Notes,||stock code ADCB01;||maturing 8 March 2018 (“R400m 5 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. The R100m ADCB02 3 Year Secured Term Notes were redeemed upon maturity on 1 August 2016.
Adcorp is the largest diversified workforce and business process outsourcing company in South Africa, offering placements over a wide range of industries. The Issuer’s bank accounts and trade receivables, among others, were ceded to the Security SPV in accordance with the Security Cession Agreement as collateral for the due, proper and timely 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 agreements.
The Transaction depends on the ability of Adcorp, and after the occurrence of an Event of Default, the Security SPV, to collect payments under the trade receivables. The amount collected on the total debtors book as a percentage of the previous month’s outstanding debt balance fluctuates from month to month, and averaged 62.0% for the period from January 2016 to May 2016, albeit ending the period at a peak of 75.9%. The total debtors’ ageing profile has remained stable since January 2015, with the average debtors in the 120+ days delinquency bucket being only 10% (May 2016: 10%).
Adcorp included three additional entities to the pool of ceded debtors in June 2016, with a fourth anticipated to be added in August 2016. Total ceded debtors have grown significantly since January 2015 and continued to be reported at sturdy, but receding levels with a book value of R1.51bn at 30 June 2016 (FYE16: R1.59bn). Good ceded debtors (up to 90 days in arrears) were reported as 86.8% at 30 June 2016, the lowest reported level since the initial rating of the Group 1 Notes. GCR will continue to closely monitor the ageing of the ceded debtors book.
The Transaction covenants continued to be met, with the Debtors Cover Ratio reported as 1.56x (covenant: ≥1.5), whilst the EBITDA Interest Cover Ratio was reported as 4.57x (covenant: ≥4) at 30 June 2016. All unsecured debt is excluded from the Debtors Cover Ratio calculation. The debtors days for the South African operations were maintained at 47 days.
The ratings of the Group 1 Notes are derived by applying a notching approach, starting from the senior unsecured long-term corporate credit rating of the Issuer. The ratings incorporate the recoveries from the ceded trade receivables and relate to the ultimate repayment of interest and principal (as opposed to timely, akin to a loss severity rating, which is a function of probability of default and loss severity). 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.
+27 11 784 1771
Structured Finance Analyst
+27 11 784 1771
Sector Head: Structured Finance Ratings
+27 11 784 1771
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Structurally Enhanced Corporate Bonds Rating Criteria – Oct ’15;
Global Criteria for Rating Corporate Entities – Feb ’16; and
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.
|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 ratings 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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings 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 ratings above were solicited by the Arranger and Issuer of the Transaction; GCR has been compensated for the provision of the ratings.
The credit ratings have been disclosed to the Arranger and Issuer with no contestation of the ratings.
The information received from the Arranger / Issuer:
- Historical trade receivables data of the total portfolio up to May 2016 and for the ceded portfolio up to June 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 30 June 2016;
- Compliance Certificates up to 30 June 2016;
- Adcorp Legal Report as at May 2016 and the total legal collections due; and
- Final, signed and executed Transaction documents.