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.
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)
|Outlook: Stable||Outlook: Negative|
|Primary Analyst||Secondary Analyst|
|Omega Collocott||Kurt Boere|
|Sector Head: Financial Institution Ratings||Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Senior Credit Analyst|
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