Johannesburg, 27 July 2017 – Global Credit Ratings has today accorded the Industrial Development Corporation of South Africa Limited national scale Issuer ratings of AA+(ZA), and A1+(ZA) in the long term and short term respectively. The ratings have been accorded a Stable outlook.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Industrial Development Corporation of South Africa Limited (“IDC”) based on the following key criteria:
The IDC has a long, successful track record of developing industrial companies and supporting them through their lifecycle. Accordingly, the corporation forms a crucial element in the South African Government’s plans to stimulate economic growth through industrialisation, whilst also driving job creation and economic empowerment initiatives. Although the IDC is a State Owned Enterprise, it is overseen by an independent Board of Directors, and has substantial operational independence, particularly with respect to approving specific investments. There are several policies in place to manage conflicts of interest and potential political interference. The IDC also falls under the purview of the Public Finance Management Act (as a schedule 2 entity) and is thus required to present its strategy and performance to parliament on a regular basis.
As a development agency, the IDC’s mandate allows it to accept a greater level of risk than commercial institutions. To manage this, it has a robust investment approval policy that requires extensive due diligence and credit assessments before any funding can be disbursed. In addition, the corporation has imposed individual transaction and counterparty limits based on an expected maximum loss, such that its capital base is not unduly exposed to potential losses.
Operating performance has been constrained by the weak economic environment, particularly as a large portion of the IDC’s investment portfolio relates to mining and metals companies, or those in downstream industries. As a result, dividend income has decreased over the review period, while a number of large impairments to investments have been incurred. FY17 did evidence a slight recovery for many of the investments, and thus an increase in earnings, but the IDC’s performance remains highly exposed to commodity price volatility.
The high exposure to commodity and steel companies has also seen investment valuations eroded somewhat over the review period, although the IDC’s investment portfolio has exceeded R110bn in all years under review. While this has resulted in an increase in net impairments, the impairment ratio (to asset cost) has remained around 16.7% since FY15, below the Board’s threshold of 20%. Impairments have been well controlled due to pro-active, post investment monitoring and support.
The IDC maintains a very strong standalone credit profile. Despite debt increasing steadily over the review period to R29.5bn at FY17 (FY16: R27bn), the corporation remains lowly geared, with gross debt to equity stable at 35% at FY16 and FY17 (below the Board limit of 60%) and gross debt to investment assets at 23% in both years. Around R6bn in debt matures in FY18, for which refinancing is being negotiated, with the remainder of debt fairly long term. The IDC has maintained its liquidity coverage ratio above 100% in all periods under review. Liquidity is underpinned by a large cash holdings and funding lines with a range of local and international banks, as well as access to the debt capital market, development agencies and some Government related entities.
Given the strong ratings accorded, there is limited scope for upward movement. This would only be likely if a greater proportion of the investee companies received credit ratings in line with, or exceeding, the South African sovereign rating. Conversely, sustained earnings pressure reported by key investments would impact the IDC’s profitability and cash flows and could result in a downgrade. Any challenges in refinancing or raising new debt would be negatively viewed.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (July 2017)|
|Long term: AA+(ZA)|
|Short term: A1+(ZA)|
|Rating outlook: Stable|
|Sector Head: Corporate and Public Sector Ratings|
|Senior Analyst: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2017
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S Corporates GLOSSARY
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Commodity||Raw materials used in manufacturing industries or in the production of foodstuffs. These include metals, oil, grains and cereals, soft commodities such as sugar, cocoa, coffee and tea, as well as vegetable oils.|
|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.|
|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.|
|Dividend||The portion of a company’s after-tax earnings that is distributed to shareholders.|
|Downgrade||The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Downstream||Downstream refers to the processing of raw materials into a product required by end users and consumers.|
|Equity||Equity 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.|
|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.|
|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.|
|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.|
|Mandate||Authorisation or instruction to proceed with an undertaking or to take a course of action. A borrower, for example, might instruct the lead manager of a bond issue to proceed on the terms agreed.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|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.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|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.|
|Under Review||Failure to carry out a full review of a rated entity within the designated timeframe, either through lack of information or delays in finalisation, i.e. review is ongoing.|
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 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.
The Industrial Development Corporation of South Africa 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 the Industrial Development Corporation of South Africa with no contestation of the ratings.
The information received from the Industrial Development Corporation of South Africa and other reliable third parties to accord the credit ratings included:
- Audited financial statements for FY17, and four years comparative numbers
- FY17 results presentation
- Corporate plan 2017/18-2021/22
- Asset-Liability Committee information pack May 2017
- The IDC Act
- Board and committee composition documentation
- Credit approval policy
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 the Industrial Development Corporation of South Africa Limited a rating of AA+(ZA), Outlook Stable.