Johannesburg, 19 September 2017 – This market alert follows rating action taken in June 2017, where Global Credit Ratings (“GCR”) downgraded Adcorp Holdings Limited’s (“Adcorp”) national scale Issuer ratings to BBB-(ZA) and A3(ZA) for the long and short term respectively, and downgraded the ratings accorded to the following Senior Secured Notes (“Group 1 Notes”) to BBB+(ZA):
|●||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 Issuer and Group 1 Notes’ ratings are on Rating Watch, and continue to be closely surveilled.
As communicated in the June 2017 Rating Announcement, the Rating Watch status on the Issuer and Group 1 Notes continues to be informed by concerns of a strong possibility of a breach of at least one of the Group 1 Notes’ transaction covenants. Specifically, the EBITDA interest cover ratio, which albeit not breached to date, was reported at the covenant limit of 4.0x as of 31 July 2017. The debtors cover ratio also continues to track close to the minima of 1.5x (31 July 2017: 1.6x), with both covenants remaining under significant pressure at current debt levels.
GCR, however, notes that since the last review Adcorp has taken a number of positive steps to return the group to a sustainable financial position. Adcorp has reconstituted its board of directors, and has a new executive management team, which is in the process of right-sizing the group’s operations. Management is also in the process of securing a syndicated bank facility that will allow for the redemption of the Group 1 Notes (which is deemed more suitable to Adcorp’s funding requirements and intentions to materially deleverage its operations), as well as the engagement of both the shareholders and debt funding counterparties in establishing a sustainable funding structure. An agreement has been reached to sell Adcorp’s stake in Nihilent (subject to South African competition authorities’ approval), whose proceeds of USD25.5m will be used to reduce existing debt.
With respect to the Group 1 Notes, an unremedied breach of the covenants would constitute an ‘event of default’, which according to the Medium-Term Note Programme Memorandum, would allow any holder of Group 1 Notes to declare the notes held by that noteholder to be immediately due and payable, and require the notes to be repaid at the Early Redemption Amount, together with any accrued unpaid interest thereon. GCR continues to monitor developments in this regard, and in the absence of comfort in the form of an agreement with noteholders to condone a possible covenant breach, would likely take negative rating action with respect to the ratings.
The ratings accorded to the Group 1 Notes by GCR relate to ultimate payment of interest and principal (as opposed to timely payment, which is akin to an expected loss rating, which is in turn a function of probability of default and loss severity). As such, GCR continues to consider the credit enhancement derived from the trade receivables ceded to the Security SPV in accordance with the Security Cession Agreement. The assessment of collateral still evidences “Superior Recovery Prospects” on the Group 1 Notes, which does provide comfort to noteholders in an enforcement scenario, and accordingly, GCR continues to apply a notching approach in according the Group 1 Note ratings. That said, migration of the Issuer rating to the “BB(ZA)” band could curtail the upward notching applied to the Group 1 Notes. Obligations to overdraft facility providers (FirstRand Bank Limited: R190m and Absa Bank Limited: R170m), rank pari passu and share pro rata in terms of the security agreements.
Senior Credit Analyst: Corporate Ratings
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|Sector Heads/Committee Chairpersons
Senior Credit Analyst: Corporate Ratings
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Senior Analyst: Structured Finance Ratings
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Sector Head: Structured Finance Ratings
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Structurally Enhanced Corporate Bonds Rating Criteria – Sep ‘16
Global Master Criteria for Rating Corporate Entities – Feb ’17
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
|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.|
|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.|
|Bond||A long-term debt instrument issued by either: a company, institution or the government to raise funds.|
|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 Enhancement||Limited protection to a transaction against losses arising from the assets. The credit enhancement can be either internal or external. Internal credit enhancement may include: Subordination; over-collateralisation; excess spread; security package; arrears reserve; reserve fund and hedging. External credit enhancement may include: Guarantees; Letters of Credit and hedging.|
|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).|
|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 a certain number of days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors.|
|Downgrade||The assignment of a lower credit rating to a corporate, sovereign of debt instrument by a credit rating agency. Opposite of upgrade.|
|Early Redemption||The repurchase of a bond by the issuer before it matures.|
|Enforcement||To make sure people do what is required by a law or rule et cetera.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|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.|
|Notching||A movement in ratings.|
|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.|
|Rating Outlook||A 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).|
|Rating Watch||Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.|
|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.|
|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.|
|Senior||A security that has a higher repayment priority than junior securities.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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.|
|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.|
|Surveillance||Process of monitoring a transaction according to triggers, covenants and key performance indicators.|
|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.|
|Ultimate Payment||A measure of the principal debt, interest, fees and expenses being repaid over a period of time determined by recoveries.|
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.) in view of the rating watch, the validity of the ratings is for a maximum of six months, with GCR expected to finalise a review before or by 30 November 2017.
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.