Johannesburg, 10 July 2020 – GCR Ratings (“GCR”) has affirmed the national scale long term and short term issuer ratings of AA+(ZA)/ A1+(ZA) on South Africa based- Industrial Development Corporation of South Africa (‘IDC’, ‘the entity’). The outlook has been revised to negative.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Industrial Development Corporation of South Africa||Issuer Long Term||National||AA+(ZA)||Negative Outlook|
|Issuer Short Term||National||A1+(ZA)|
The negative ratings outlook reflects the expected quantum of market losses in the IDC’s investment portfolio in the 2020 financial year (ending March 2020), balanced by some recovery post year end. It also reflects our expectations that credit losses will rise, interest margins will drop, and payment holidays may be given, which will all pressurise core earnings over the next 12-18months, due to the extremely challenging operating environment. This, alongside the continued expansion of the loan book, we believe will reduce capitalisation from over 50% (on a financial leverage basis) at FY19 to around 40%-45% over the next 12 months, which is still considered to be very strong levels. Balancing the expected pressure on the financial profile, is the continued strong fulfilment of the mandate, with IDC being a key part of providing finance to ‘essential corporates’ in South Africa.
Over the past six to nine months the market value of IDCs listed equity portfolio (held for development purposes and not necessarily treasury operations) has faced severe volatility. GCR estimate market derived losses of between ZAR20bln and ZAR25bln over this period, which will have had a similar impact on the reserves and therefore nominal capital of the IDC. Positively, some of the market losses have reversed since the year end. However, due to the government’s proactive response to the COVID-19 pandemic, GCR are now expecting a substantive reduction in domestic economic growth, alongside an increase in corporate insolvencies. This is expected to have a negative impact on the IDC’s already high cost of risk, especially due to the relatively high and early stage risk of lending and somewhat high FX (for Rest of Africa risk) and loan book concentrations. Furthermore, in order to fulfil an extended mandate, we expect the IDC to provide anticyclical lending and where appropriate providing payment holidays / restructuring for its borrowers.
In turn, we expect core earnings to drop, especially if dividends cannot be garnered from investee companies and if interest income drops due to the reduced interest rates or longer grace/ payment holiday periods. As a result, due to all of the above, we expect the financial leverage ratio to range around the 40%-45% over the next 12months, which is still above the high end of our capital assessment. This factors in no additional capital influx from the government in the short term.
The ratings on South Africa based IDC continue reflect its protected government role as South Africa’s industrial development bank. The IDC is mandated to develop and support domestic industrial capacity, empower the South African population and promulgate balanced economic growth. Overall, we believe that the entity has a successful track-record in fulfilling is mandate and the integral role in defending ‘essential corporates’ from the expected economic downturn is further proof of this. This is all factored into the entities strong competitive position.
GCR see limited funding liquidity risks for the IDC over the next 12 months, with approximately ZAR6bln of refinancing up to March 2021 fully covered by available liquid assets. The IDC has also around ZAR10bln of undrawn committed facilities to support the growth of its loan book, most of which is longer-term. We also view positively the lack of funding covenant risk. Despite the above, we will continue to monitor the funding and liquidity position going forward, in case the closure of the wholesale markets start to bring more pressure on the entity.
Despite the full government ownership, we do not factor in extraordinary government support into the ratings of IDC because the standalone fundamentals are strong enough to support its own creditworthiness, in our opinion.
The negative outlook balances the expected deterioration of the financial profile with the continued fulfilment of mandate. GCR expect IDC’s capitalisation to reduce, but to still high levels, ranging around 40%-45% for the next 12months. We also expect asset quality to deteriorate and core earnings to reduce, probably to negative levels over this period. Positively, liquidity and funding risks are being well managed, and refinancing dates are manageable within the next six to 12 months, therefore we don’t anticipate any significant problems (outside a complete market closure) over the next 12months.
We also expect the IDC to further prove its mandate by continue finance and support to the domestic industrial base of South Africa.
We could lower the ratings on the IDC if there is a material deterioration in the asset quality, either through the lending and equity book, which impairs profitability and ultimately capitalisation. If financial leverage decreases to below 30%, which is considered to be unlikely, we would bring down the ratings, if they remind exposed to high market and credit risks. Any rise in liquidity risks, including a shortening of the funding profile, could also bring down the ratings.
|Primary analyst||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||Matthewp@GCRratings.com||+27 11 784 1771|
|Committee chair||Corné Els||Senior Structured Finance & Securitisation Analyst|
|Johannesburg, ZA||CorneE@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Long Term issuer||Initial||National||AA+(ZA)||Stable Outlook||July 2017|
|Short Term issuer||Initial||National||A1+(ZA)||July 2017|
|Long Term issuer||Last||National||AA+(ZA)||Stable Outlook||November 2019|
|Short Term issuer||Last||National||A1+(ZA)||November 2019|
Risk Score Summary
|Rating Components & Factors||Risk Scores|
|Country risk score||6.5|
|Sector risk score||6.0|
|Management and governance||0.0|
|Capital and Leverage||4.0|
|Funding structure and Liquidity||0.0|
|Benefits||Financial reimbursement and other services provided to insureds by insurers under the terms of an insurance contract.|
|Capital||The sum of money that is invested to generate proceeds.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|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.|
|Loan||A sum of money borrowed by a debtor that is expected to be paid back with interest to the creditor. A debt instrument where immovable property is the collateral for the loan. A mortgage gives the lender a right to take possession of the property if the borrower fails to repay the loan. Registration is a prerequisite for the existence of any mortgage loan. A mortgage can be registered over either a corporeal or incorporeal property, even if it does not belong to the mortgagee. Also called a Mortgage bond.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|National Scale Rating||National scale ratings measure creditworthiness relative to issuers and issues within one country.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Performing||An obligation that performs according to its contractual obligations.|
|Private||An issuance of securities without market participation, however, with a select few investors. Placed on a private basis and not in the open market.|
|Release||An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.|
|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.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term||Current; ordinarily less than one year.|
SALIENT POINTS 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; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The rated entity participated in the rating process via face-to-face management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from the entities and other reliable third parties to accord the credit rating included:
- Audited financial results as at 31 December 2018;
- Management account information for 2019;
- Latest internal and/or external audit report to management;
- ALCO and Risk packs; and
- A breakdown of facilities available and related counterparties.