Lagos, Nigeria, 11 May 2021 – GCR Ratings (“GCR”) has accorded initial national scale long-term and short-term Issuer ratings of BBB(NG) and A3(NG) respectively to CapitalSage Limited, with the Outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|CapitalSage Limited||Long Term Issuer||National||BBB(NG)||Stable Outlook|
|Short Term Issuer||National||A3(NG)|
CapitalSage Limited’s (“CapitalSage” or “the Company”) ratings reflect its ungeared position, which has supported good liquidity. However, offsetting these positive rating drivers is the Company’s modest competitive positioning, with a limited track record within the sector.
Nigerian financial technology (“fintech”) sector continues to leverage technological advances, as well as government enabling policies and initiatives towards promoting financial inclusion. The sector is considered less cyclical given the nature of the infrastructural services being rendered but is highly susceptibility to technology disruptions and cyber-attack, as activities are largely through online platforms. Also, its moderately low barriers to entry have opened the industry to potentially many competitors, thus impacting industry’s longer-term margin. However, the industry outlook remains positive given the favourable demographic and rising internet penetration. The COVID-19 pandemic and the prolonged social distancing regulation have provided a stronger business case for the sector growth, disrupting the competitive landscape for the conventional banking.
CapitalSage (formerly CreditAssist Investment Limited) is an integrated digital financial service group, incorporated in July 2018. Its product offerings include agency banking, online savings, payment solutions, investments, and fund diversification. The Company’s overall competitive position is relatively low given its modest niche within the broader financial services sector, its limited track record, having only operated for barely two years, and as its products and services are easily replicated. To diversify its operation, the Company acquired Cintrust Microfinance Bank, a member of Odua Cooperative Conglomerate Limited, in November 2020. The bank is licenced by Central Bank of Nigeria in April 2018 to provide a microfinance banking services within its immediate community in Oyo State, Nigeria. GCR does not think the acquisition will make a material change to the competitive position in the short-term.
While management and governance are currently not a constraint on the rating, any disclosure shortfall in the group financial statements in the coming year and/or any material restatements could trigger a negative adjustment.
Earnings is neutral factor to the rating. The Company recorded strong revenue growth in FY20, with earnings primarily generated from commission earned from transactions through agents. Its strategic plan is to expand coverage to all the 36 states of the country, focusing on product innovation and development of new and competitive payment platform to capture higher market share, while also leveraging its microfinance banking services. However, revenue stability is yet to be fully tested and future targets may be constrained by the heightened competition within the fintech space. EBITDA margin is considered moderate, increasing sharply in FY20 on the back of higher scale and it is expected to remain competitive around 23% in the coming years. This notwithstanding, GCR takes a negative view of the potential credit losses that may arise from the enlarged loan portfolio, as the Company consolidates its accounts and builds up its loan book through its banking subsidiary.
CapitalSage has reported strong cash flows over the two-year period on the back of good earnings. While the cash flows have been sufficient to cover operations and have reduced the need for debt, the planned expansion drive is expected to create some funding pressures, likely necessitating future debt support. However, the ability to scale up earnings should see cash flow and leverage metrics within moderate level over the medium-term rating horizon if debt is eventually raised. Conversely, a negative adjustment is taken due to the Company’s low capital base, which is well below GCR’s acceptable threshold of USD20m, exposing CapitalSage to single event/stress loss.
The Company’s uses and sources liquidity coverage is estimated at above 2x, over the next 12 months. This is predicated on strong cash flows and existing cash holding, while cash outflow is mainly working capital requirements for expanding operations. However, this position could be adversely impacted in the medium to long term if the Company considers a debt issuance.
The Stable Outlook reflects GCR’s expectation that earnings and cash flow will remain strong, supportive of a moderate creditworthiness. Even if debt is raised to support the expansion drive, GCR does not expect this to have a significant negative impact on CapitalSage’s financial profile in the short-term, with net debt to EBITDA anticipated to register within 2x, and funds from operations to net debt ratio above 30%.
A positive rating migration is unlikely in the short term, given the Company’s modest competitive positioning within the broader financial services sector. That said, a dominant market share of the shared agent network, while maintaining a strong credit profile could be positively considered. Conversely, a negative rating action could be driven by materially adverse regulatory developments within the fintech sector, and/or an underperformance of earnings after a debt issuance, which impair credit protection metrics, and result in 1) Net debt to EBITDA above 2x, 2) EBITDA coverage of net interest below 5x, 3) Funds from operations to net debt ratio below 30% and 4) uses vs. sources liquidity coverage below 2x.
|Primary analyst||Femi Atere||Senior Analyst|
|Lagos, Nigeria||femi@GCRratings.com||+234 1 904 9462|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||Matthewp@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Financial Services Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, February 2021|
|GCR Nigerian Non-Bank Financial Institutions Sector Risk Scores, February 2021|
|GCR Nigerian Telecommunication Sector Risk Scores, February 2021|
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long term Issuer||Initial/last||National||BBB(NG)||Stable||April 2021|
|Short Term Issuer||Initial/last||National||A3(NG)|
RISK SCORE SUMMARY
|Country risk score||3.75|
|Sector risk score||2.50|
|Management and governance||0.00|
|Leverage and Cash flows||2.00|
|Earnings v Risks||0.00|
|Total Risk Score||6.50|
|Credit Rating||See GCR Rating Scales, Symbols and Definitions.|
|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 exposures 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.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks|
|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.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Rating horizon||The rating outlook period, typically 18 to 24 months.|
|Risk Management||The 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.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings process 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit ratings have been disclosed to CapitalSage Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
CapitalSage Limited participated in the rating process via tele-conferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from CapitalSage Limited and other reliable third parties to accord the credit ratings included:
- 2019 and 2020 audited annual financial statements for CapitalSage Limited
- 2019 and 2020 audited annual financial statements for Cintrust Microfinance Bank Limited
- Internal and/or external management reports
- Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties;
- Information specific to the rated entity and/or industry was also received;