Johannesburg, 07 November 2016 — Global Credit Ratings has today accorded GardaWorld Kenya’s medium term note (“MTN”) programme an indicative* national scale long term debt rating of BBB(KE), with the a stable outlook. The indicative bong rating is valid until February 2017.
Concurrently, GCR has affirmed Kenya Kazi Limited’s national scale long term debt rating of BBB(KE) and a national scale short term debt rating of A3(KE). The ratings outlook has been amended to Stable from Positive previously. The Issuer ratings for Kenya Kazi Limited are valid until September 2017.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to the GardaWorld Kenya (“GWK”) MTN programme and Kenya Kazi Limited (“KK”) based on the following key criteria:
Canadian based GardaWorld Corporation has agreed to acquire a 100% shareholding in KK. In structuring the acquisition, GardaWorld Corporation has established a Kenyan domiciled subsidiary, GWK, with its sole asset being a 100% shareholding in KK Security. KK is an established and strongly regarded East Africa security services provider, with one of the largest operating infrastructures in the region. It has contracts with many prominent embassies, NGOs, blue chip corporates and private institutions.
GWK is now in the process of issuing a KES1,800 million 5-year medium term note. Interest on the notes will be paid semi-annually and the principal will be redeemed as a bullet payment at the end of the 5-year period. GWK intends to use the note proceeds to refinance KK’s outstanding debt, being c.KES1,000m in commercial paper and c.KES300m in bank facilities. The remainder of funding will be utilised to settle acquisition costs. The notes represent direct, general, unconditional, unsubordinated and unsecured obligations of the Issuer which (a) rank pari passu among themselves and (b) rank pari passu with all present and future direct, general, unconditional, subordinated and unsecured obligations of the Issuer.
In the KK rating report (dated September 2016), GCR had indicated that it felt there was little leeway for further debt raising without prejudicing credit protection, until profitability improves. Within this context, GCR has considered the added KES500m in net debt to be assumed (in excess of the c.KES1,300m for refinancing). Based on forecasts for the F17 to F21 period, this would see net debt to EBITDA rise to c.2.6x at FYE17, although interest cover will remain adequate at c.2.6x. Thereafter GWK is projecting a steep increase in debt to KES3.4bn at FYE19 (due to earn out payments), which would place credit metrics under some pressure. Interest cover would fall to just above 2x, although if the free cash flow budget is met, then such concerns will be alleviated. GWK is, however, projecting positive free cash flow in F17 and in excess of KES350m from F18. Nevertheless, this will be dependent on the attainment of the fairly robust earnings targets over the forecast period, which in turn is reliant on no further unexpected change or adverse forex movements.
As GWK’s sole asset is its 100% stake in KK, its financial strength is directly determined by the financial strength of KK. In September 2016 GCR initially accorded KK a national scale rating of BBB(KE) in the long term and A3(KE) in the short term, with a Positive Outlook. However, based on updated financial projections, which indicate that gearing will be higher than initially anticipated, GCR does not consider an upgrade likely in the short term to medium and thus the KK rating outlook has been amended to Stable, whilst both the long and short term ratings have been affirmed. (For a further discussion of KK, users are directed to the full KK rating report, published September 2016.)
* The indicative, public rating accorded relates to the KES or USD-denominated fixed rate notes. Final ratings will be accorded to the KES or USD-denominated notes following their issuance, as well as the confirmation of the terms and conditions indicated in the pricing supplement.
|NATIONAL SCALE RATINGS HISTORY|
|Kenya Kazi Ltd (September 2016)|
|Long term: BBB(KE); Short term: A3(KE)|
|GardaWorld Kenya (November 2016)|
|MTN programme: BBB(KE)|
|Sector Head: Corporate and Public Sector Ratings|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2016
KK rating report, September 2016
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S Corporates GLOSSARY
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Commercial Paper||Commercial paper is a negotiable instrument with a maturity of less than one year.|
|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.|
|Economies Of Scale||Economies of scale are the cost advantages of an increase in output if the fixed costs of doing so, such as those for plant and equipment, remain the same. The marginal cost, or the cost of the last unit of production, falls as output is raised.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|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.|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|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.|
|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 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.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Pari Passu||Securities issued with a pari passu clause have rights and privileges that are equivalent to those of existing securities of the same class. Pari passu means ‘with equal step’ in Latin.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Refinancing||The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.|
|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.|
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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
GardaWorld Kenya participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings has been disclosed GardaWorld Kenya with no contestation of the rating.
The information received from GardaWorld Kenya and other reliable third parties to accord the credit ratings included:
- Draft Medium Term Note programme memorandum
- Draft pricing supplement
- Presentation to bond investors
- Select earnings, cash flow and gearing projections
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.
GCR accords GardaWorld Kenya’s MTN programme an indicative rating* of BBB