Announcements

GCR accords a long term national scale rating of BB(ZA) to Retail Capital Proprietary Limited

Johannesburg, 9 May 2017 – Global Credit Ratings (“GCR”) has accorded national scale ratings to Retail Capital Proprietary Limited of BB(ZA) and B(ZA) in the long term and short term respectively; with the Outlook accorded as Stable. Furthermore, GCR has accorded an international scale local currency (LC) rating to Retail Capital Proprietary Limited of B; with the outlook accorded as Negative.

RATING RATIONALE

The ratings of Retail Capital Proprietary Limited (“RC” or “the company”) reflect its small size, relatively short operating history (since 2011), modest financial profile (featuring below-target capitalisation and concentrated external debt funding), as well as acceptable liquidity and returns.

RC provides finance to small and medium-sized entities (“SMEs”) through its Merchant Cash Advance (“MCA”) product, the key feature of which is linking customers’ advance repayments to a proportion of card turnover. As RC became profitable from FY14, GCR’s analysis focuses on recent periods, which are considered more analytically relevant based on their improved predictive power.

RC originated R212.6m of advances in FY16 and R224.7m for the nine-month period ended 31 December 2016 (“3Q FY17”). At FY16 balance sheet receivables (net of impairment provisions) totaled R91.2m (3Q FY17: R131.8m). Receivables reflected advances to 1,119 customers at 3Q FY17.

During FY16 and 3Q FY17 asset quality was impacted by stricter underwriting and increased customer diversification, offset by a deteriorating macroeconomic environment and higher losses on EFT receivables. The gross non-performing advance (“NPL”) ratio fell to 3.1% at 3Q FY17 (FY15: 5.7%; FY16: 4.0%), and higher provisions saw NPL coverage increase (FY15: 86.1%, 3Q FY17: 163.4%). The credit loss ratio ranged from 7.3-8.4% over the periods, with 3-month rolling write-offs starting to trend downward as EFT-based receivables reduce.

Shareholder debt (the dominant funding source pre-FY15) has largely been replaced with external institutional funding (91.3% at 3Q FY17, vs. 74.5% at FY16). Term has been significantly lengthened. External debt (concentrated by funder and maturity) is subject to common covenants. Liquidity and refinancing risk are considered acceptable, subject to covenants being met.

Equity (retained earnings) levels rose strongly from FY15, but were outpaced by asset growth (FY16: 52%, 3Q FY17: 41%) from the beginning of FY17, resulting in the primary capital/assets ratio (around 16.5% in FY15/FY16) declining to 14.8% in 3Q FY17. Including hybrid capital (long-term shareholder loans), RC’s total capital/assets ratio was 26.6% at FY16 (3Q FY17: 21.8%). While the declining trend is of concern and leverage is close to covenanted levels at 3Q FY17, implying a need for enhanced capitalisation, management has noted that attrition in the capital/assets ratio has started to reverse from the end of 3Q FY17, given strong funded advances growth and RC’s high operating leverage. RC’s capital/asset ratio target (25%) is considered adequate relative to its risk profile.

Upward income momentum, driven by advances growth, was moderated by rising funding costs and lower margins. Strong origination and higher NPL coverage boosted the impairment charge, and high operating cost growth due to infrastructure up-scaling has pushed the cost/income ratio from 66.1% in FY15 to 85.3% in 3Q FY17. In FY15 and FY16 RC delivered ROaA of 14.0% and 7.1% respectively. Pre-tax return on average capital (including hybrid capital), declined to 24.4% in FY16 (FY15: 55.4%), rising to an annualised 27.5% in 3Q FY17.

An extended track record of improving profitability and internal capital generation, evidence of enhanced operating efficiency, maintenance of a stable or strengthened capital structure, and asset quality stability could enhance the ratings. Negative rating action may follow a reduction in operating efficiency, asset quality and profitability metrics, and/or reduced buffers in respect of leverage, interest coverage or loss experience covenants.

NATIONAL SCALE RATINGS HISTORY   INTERNATIONAL SCALE RATING HISTORY
     
Initial/last rating (Apr/2017)

Long-term: BB(ZA); Short-term: B(ZA)

  Initial/last rating (Apr/2017)

Long-term: B

Outlook: Stable   Outlook: Negative

ANALYTICAL CONTACTS

Primary Analyst   Secondary Analyst
Omega Collocott   Kurt Boere
Sector Head: Financial Institution Ratings   Credit Analyst
(011) 784-1771   (011) 784-1771
omegac@globalratings.net   boere@globalratings.net
     
Committee Chairperson    
Jennifer Mwerenga    
Senior Credit Analyst    
(011) 784-1771    
jennifer@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017

Criteria for Rating Finance and Leasing Companies, updated March 2017

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.

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 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 rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Retail Capital Proprietary Limited participated in the rating process via management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.

The credit ratings have been disclosed to Retail Capital Proprietary Limited with no contestation of the ratings.

The information received from Retail Capital Proprietary Limited and other reliable third parties to accord the credit ratings included:

  • Audited financial results of the company to 31 March 2016 (plus four years of comparative numbers);
  • Unaudited management accounts for the nine-month period to 31 December 2016;
  • Budgets for Retail Capital Proprietary Limited for FY17;
  • A breakdown of facilities available and related counterparties;
  • Corporate governance and enterprise risk framework; and
  • Information specific to the rated entity or industry.

The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY

Asset A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Asset Quality Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.
Balance Sheet Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Budget Financial plan that serves as an estimate of future cost, revenues or both.
Capital The sum of money that is invested to generate proceeds.
Cash Funds that can be readily spent or used to meet current obligations.
Corporate Governance Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.
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.
Credit Rating Agency An entity that provides credit rating services.
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.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Equity Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
Financial Institution An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.
Impairment Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.
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.
International Scale Rating LC International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. 
Long-Term Not current; ordinarily more than one year.
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.
Margin The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
National Scale Rating 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.
Primary Capital Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
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 Any outstanding debts, current or not, due to be paid to a company in cash.
Refinancing The issue of new debt/loan to replace maturing debt/loan. New debt may be provided by existing or new lenders, with a new set of terms in place.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
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.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
Short-Term Current; ordinarily less than one year.
Short-Term Rating An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.
   

For a detailed glossary of terms please click here

GCR accords a long term national scale rating of BB(ZA) to Retail Capital Proprietary Limited

Leave a Reply



ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright © 2021 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.