Johannesburg, 26 February 2016 — Global Credit Ratings (‘GCR’) has affirmed the final, public long term credit ratings of ‘A(ZA)’ with a Stable Outlook to the following Senior Secured Notes:
|●||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.
Adcorp Holdings simplified the security structure of the Group 1 Notes by introducing a Security SPV (Bowwood & Main No. 39 (RF) (Pty) Ltd) together with a Security SPV Guarantee and a Security Cession Agreement in November 2015. The Security SPV will act in favour of the Group 1 Noteholders and secured facilities providers, pursuant to the SPV Guarantee. The Issuer will in turn indemnify the Security SPV in respect of claims that may be made against the Security SPV arising out of the Security SPV Guarantee.
The Issuer’s bank accounts and trade receivables, amongst others, have been ceded, as a security pool, in securitatem debiti 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: R179m). The security pool forms a shared collateral facility for the secured funders, who rank pari passu and share pro rata in terms of the security agreement.
The conclusion of the acquisition of Kelly Group Limited (“Kelly”) triggered the introduction of the latter’s trade receivables as part of the security pool in July 2015. Resultantly, the total ceded debtors book increased by 21% to R1.35bn (June 2015: R1.12bn), and further to R1.58bn as at 31 December 2015. The debtors book experienced difficult collections periods due to seasonality, which saw the “Current” ceded debtors reaching an all-time low of 51% in December 2015 (70% in December 2014), compared to the 12-month average of 64% for the year 2015.
FYE15 debtors days (including Kelly) registered at 46 days, down from 48 days as at FYE14 for Adcorp’s South African operations. Adcorp previously reported debtors days at 41 days as at FYE13, from 36 days as at both FYE11 and FYE12 respectively, with each incremental day requiring an estimated additional working capital of c.R40m.
The Debtors Cover Ratio was reported as 1.52x (covenant: ≥1.5), whilst the EBITDA Interest Cover Ratio was reported as 5.69x (covenant: ≥4) at 31 December 2015. Interest Bearing Debt does not include unsecured encumbrances (R169m), as defined in the Finance Documents, for the Debtors Cover Ratio calculation purposes.
The restricted property increased from 3.77% in June 2015 to 8.75% in July 2015, due to the inclusion of Kelly, and remained at that level up to September 2015. The December 2015 restricted property was recorded at 5.55%.
The consolidated group net cash balance for FRB was R141.3m (R505.2m cash and R363.9m overdraft) and the consolidated group net cash balance for Absa was a net overdraft of R6.6m (R94.2m cash and R100.7m overdraft) respectively, as at 31 December 2015.
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. GCR is comfortable that both parties can satisfactorily perform this role. The covenants in place also provide a level of structural protection.
The ratings of the Notes are derived by applying a notching approach from the senior unsecured long term credit rating of the Issuer. Based on the expected “Superior Recovery Prospects” on the Senior Secured 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 ’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.
|Ageing||The age of an asset or obligation.|
|Agent||An agreement where one party (agent) concludes a juristic act on behalf of the other (principal). The agent undertakes to perform a task or mandate on behalf of the principal.|
|Agreement||A negotiated and usually legally enforceable understanding between two or more legally competent parties.|
|Applicable Pricing Supplement||A transaction document that describes the particulars of notes issued.|
|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.|
|Bad Debt||A bad debt is an amount owed by a debtor that is unlikely to be paid when due, for example, to a company going into liquidation. This typically refers to default rather than delinquency.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|Capital||The sum of money that is used to generate proceeds.|
|Claim||A formal request or demand.|
|Collateral||An asset pledged as security in event of default.|
|Conduit||A commercial lending entity that is established to purchase assets to securitise.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The probability or likelihood that a borrower or issuer will not meet its debt obligations. Credit Risk can further be separated between current credit risk (immediate) and potential credit risk (deferred).|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|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.|
|Delinquency||When a receivable is overdue and not paid on its payment due date.|
|EBITDA||EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.|
|Enforceable/Enforcement||To make sure people do what is required by a law or rule et cetera.|
|Guarantee||An undertaking for performance of another’s obligations in event of default.|
|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.|
|Junior||A security that has a lower repayment priority than senior securities.|
|Lease||Agreement or temporary use and enjoyment of a corporeal thing (movable or immovable property) the whole or part thereof for rent. The essential elements of a contract of lease are: 1.) Undertaking of lessor to give the lessee the use and enjoyment of something; 2.) Agreement between the lessor and lessee that the lessee’s right to use and enjoyment is temporary; and 3.) Lessee’s undertaking to pay a sum or rent.|
|Lender||A credit provider that is owed debt obligations by a debtor.|
|Lessee||The party that enjoys temporary use of a corporeal thing.|
|Lessor||The owner or agent that acts on behalf of the owner of property that grants the temporary use of a corporeal thing.|
|Liability||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|Lien||A right of retention of someone else’s property due to expensed money or labour on property acquires a lien until payment is made. A lien outranks all other forms of security claims. A lien arises by operation of law and not as agreement between parties. There are three types of liens: 1.) Storage or salvation of property; 2.) Improvement of property; and 3.) Contractual debt.|
|Liquidation||The process by which a company is wound-up and its assets distributed to creditors. Liquidation proceedings are initiated either compulsorily or voluntarily by the company.|
|Liquidity||The ability to repay short-term obligations or short-term availability of liquid assets to a market or entity.|
|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 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.|
|Obligor||The party indebted or the person making repayments for its borrowings.|
|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.|
|Pledge||Constituted by an agreement between the pledgor, who undertakes to deliver the article, and the pledgee, and subsequent delivery of the property in question as security for debt. A pledge is only applicable to movable property.|
|Pricing||A process of determining the price of a debt security.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Proceeds||Funds from issuance of debt securities or sale of assets.|
|Property||Movable or immovable asset.|
|Provision||An amount set aside for expected losses to be incurred by a creditor.|
|Ranking||A priority applied to obligations in order of seniority.|
|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.|
|Rent||Payment from a lessee to the lessor for the temporary use of an asset.|
|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/s above were solicited by the Arranger and Issuer of the Transaction; GCR has been compensated for the provision of the rating/s.
The credit rating/s has been disclosed to the Arranger and Issuer with no contestation of the rating/s.
The information received from the Arranger / Issuer:
- Historical trade receivables data of the total and ceded portfolio from January 2008 to December 2015;
- 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 28 February 2015 and year-to-date (December 2015) management accounts;
- Adcorp Holdings Credit Policy, credit application and terms & conditions;
- Final, signed Applicable Pricing Supplements for the listed and unlisted Notes;
- Draft Applicable Pricing Supplement for the proposed Notes to be issued;
- Compliance Certificates up to date 31 December 2015; and
- Adcorp Legal Report as at January 2015 and the total legal collections due.