Announcements

Adcorp Holdings Ltd Long Term National Scale Ratings and Group 1 Notes – Negative Outlook acco

Johannesburg, 19 May 2017 — Global Credit Ratings (“GCR”) has accorded a Negative Outlook to Adcorp Holdings Limited’s (“Adcorp”) long-term national scale Issuer rating and its Group 1 Notes ratings. Concurrently, the following Adcorp ratings have also been placed under review for possible downgrade:

Long-term National Scale;
BBB(ZA)
Negative Outlook;
Group 1 Notes, stock code ADCB01;
A(ZA)
Negative Outlook;
Group 1 Notes, stock code ADCB04;
A(ZA)
Negative Outlook; and
Group 1 Notes, stock code ADCB05;
A(ZA)
Negative Outlook.

RATING RATIONALE

Adcorp is the largest diversified workforce and business process outsourcing company in South Africa, offering placements over a wide range of industries.

The Adcorp year-end results are scheduled to be released on 24 May 2017. In keeping with JSE listing requirements, Adcorp released a statement highlighting substantial earnings pressure on 5 May 2017. This has raised concerns in respect of Adcorp’s ability to maintain the EBITDA Interest Cover Ratio covenant that applies to its Group 1 Notes, given the earnings pressure, subdued operating climate, and current liability profile. Management indicated that they have embarked on a project to deleverage the balance sheet. Adcorp has R209m ADCB04 Group 1 Notes that are scheduled to mature on 27 November 2017 and R400m ADCB01 Group 1 Notes that are scheduled to mature on 8 March 2018.

GCR was scheduled to review the Group 1 Notes ratings on 25 May 2017 and Adcorp’s Issuer ratings in August 2017, however given the above, GCR has revised the respective rating outlooks on the Issue and Issuer ratings to Negative, and expects to have finalised the rating review process by 30 June 2017.

Adcorp’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.

RATINGS HISTORY

Issuer rating/

Stock code
Initial rating
Long -term rating
Short-term rating
Outlook
Long-term
December 2012
BBB(ZA)
n.a
Stable
Short-term
December 2012
n.a
A3(ZA)
n.a
ADCB01
March 2013
A(ZA)
n.a
Stable
ADCB04
November 2014
A(ZA)
n.a
Stable
ADCB05
December 2015
A(ZA)
n.a
Stable
       
Issuer rating/

Stock code
Last rating
Long-term rating
Short-term rating
Outlook
Long-term
August 2016
BBB(ZA)
n.a
Positive
Short-term
August 2016
n.a
A3(ZA)
n.a
ADCB01
February 2017
A(ZA)
n.a
Stable
ADCB04
February 2017
A(ZA)
n.a
Stable
ADCB05
February 2017
A(ZA)
n.a
Stable

ANALYTICAL CONTACTS

Patricia Zvarayi

Senior Analyst

+27 11 784 1771

Patricia@globalratings.net

Corne Els

Senior Structured Finance Analyst

+27 11 784 1771

cornee@globalratings.net

Committee Chairperson

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 – Sep ’16;

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

Adcorp Holdings Limited Group 1 Notes Surveillance Report – Feb ’17;

Global Master Criteria for Rating Corporate Entities – Feb ’17; and

Adcorp Holdings Limited Corporate Rating Report – Aug ’16.

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.
Capital The sum of money that is invested to generate proceeds.
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 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. 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.
Default Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.
Downgrade The assignment of a lower credit rating to a corporate, sovereign of debt instrument by a credit rating agency. Opposite of upgrade.
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.
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.
National Scale Rating The national scale 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.
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.
Pledge An asset or right delivered as security for the payment of a debt or fulfilment of a promise, and subject to forfeiture on failure to pay or fulfil the promise.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
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).
Receivables General term for economic benefit derived from an asset.
Redemption The repurchase of a bond at maturity by the issuer.
Release An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.
Risk The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.
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.
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.
Timely Payment The principal debt, interest, fees and expenses being repaid promptly in accordance with the contractual obligation.
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.
Under Review Failure to carry out a full review of a rated entity within the designated timeframe, either through lack of information or delays in finalisation, i.e. review is ongoing.

For a detailed glossary of terms utilised in this announcement please click here

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the ratings were 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 are 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.

Adcorp Holdings Ltd Long Term National Scale Ratings and Group 1 Notes – Negative Outlook accorded with Ratings Under Review for Downgrade

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