Johannesburg, 26 July 2017 – Global Credit Ratings has assigned national scale ratings to ASL Credit Limited of BBB-(KE) and A3(KE) in the long and short term respectively. Concurrently a Commercial Paper rating of A3(KE) was also accorded. The ratings have been accorded a Stable outlook, and are valid until June 2018.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to ASL Credit Limited (“ASL Credit”, “the company”) based on the following key criteria:
The ratings of ASL Credit reflect its established and streamlined business model (offering hire purchase finance for new/used vehicles and industrial machinery to businesses and individuals), small size compared with larger peers in the banking sphere, sound asset quality, modest capitalisation, as well as acceptable liquidity and returns.
ASL Credit is part of the Ramco Group, a privately-owned group of 40 companies across four East African countries with an annual turnover exceeding USD265m in FY16. The group operates in six distinct sectors ie, printing, hardware, office supplies, services (including ASL Credit), real estate development and manufacturing.
The company’s primary capital/assets ratio was a slightly reduced 13.3% at FY16 (FY15: 13.8%). Including shareholder loans, the total capital/assets ratio was 14.6% at FY16 (FY15: 15.2%). The leverage (external debt/equity) ratio closed the year at 4.4 times for FY16 (FY15: 3.8 times). ASL Credit’s internal policies stipulate a maximum leverage (for external borrowings) ratio of 1:5 (ie, 5 times).
Gross non-performing loans (“NPLs”) grew by 63.4% in FY16 to 1.4% (FY15: 1.1%) of gross loans, largely attributable to a single borrower. Adopting a conservative provisioning policy, NPLs were fully provided for at FY16. When a customer defaults on payment of instalments due, ASL Credit may repossess the goods, a vendor protection not available with unsecured consumer credit. Notwithstanding this, GCR takes cognisance of collateral constraints (eg, challenging economic environment and low vehicle demand) and the negative impact on second hand vehicle prices when liquidating collateral. According to management, most collateral securities (especially motor vehicles) have a ready market as long as the asset is well maintained. From past experience, when recovery is initiated, approximately 50-60% of the value of collateral securities is realised, when put through auction or forced sale. To contain NPL formation, lending mainly targets reputable customers, whilst comprehensive insurance is compulsory.
Pre-tax profit was down by 2.2% in FY16 (FY15: 5.0% decrease) mainly due to significant growth (19.8%) in operating expenditure driven by expansion related costs (increased headcount and marketing costs). Consequently, the cost/income ratio increased to 55.2% in FY16 (FY15: 50.3%). Overall, the ROaE and ROaA decreased to 13.7% (FY15: 17.7%) and 1.9% (FY15: 2.3%) in FY16. The ability of the company to service debt as measured by the interest coverage ratio decreased to 1.2x in FY16 (FY15: 1.3x).
The company’s management maintains flexibility in funding by ensuring availability of committed credit lines. At FY16, ASL Credit was in a manageable liquidity position with unutilised but committed and available credit lines and unrestricted cash available covering debt maturing in the next 12 months by 0.8 times. ASL Credit’s liquidity position is also supported by KES3.0bn outstanding receivables in the next 12 months.
To strengthen internal controls, and improve operating efficiency and reporting, ASL Credit is developing and implementing a new enterprise resource planning (“ERP”) software system in 2017 to automate and integrate its operations and accounting systems. The new IT system is also expected to pave the way for the establishment of a business continuity plan (“BCP”) policy to reduce operational risk.
An extended track record of improving profitability and internal capital generation, evidence of enhanced operating efficiency, maintenance of a stable or strengthened capital structure, asset quality stability, improved internal control and risk management oversight, could lead to upward ratings migration. However, a substantial reduction in operating efficiency, asset quality and profitability metrics, and/or reduced buffers in respect of leverage, interest coverage and liquidity, could result in negative rating action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (June 2017)|
|Long-term: BBB-(KE); Short-term: A3(KE)|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Global 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. 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 rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
ASL Credit Limited participated in the rating process via face-to-face 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 ASL Credit Limited with no contestation of the rating.
The information received from ASL Credit Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results of ASL Credit Limited to 31 December 2016 (plus four years of comparative numbers);
- Management accounts to 30 April 2017;
- Budgeted financial statements for 2017;
- Latest internal and/or external audit reports to management;
- A breakdown of facilities available and related counterparties; and
- Reserving methodologies and capital management policy.
The ratings above were solicited by, or on behalf of, ASL Credit Limited, 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.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|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.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Commercial Paper||CP is a negotiable instrument with a maturity of less than one year.|
|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.|
|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.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|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.|
|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.|
|Operational Risk||The risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. This includes legal risk, but excludes strategic risk and reputational risk.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|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.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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.|
|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 glossary of terms please click here
GCR accords an initial rating of BBB-(KE) to ASL Credit Limited; Outlook Stable.