Announcements Financial Institutions Rating Alerts

GCR affirms AA+(ZA)/A1+(ZA) ratings on Industrial Development Corporation of South Africa, outlook revised to stable.

Rating Action

Johannesburg, 23 August 2021 – GCR Ratings (“GCR”) has affirmed the AA+(ZA) / A1+(ZA) ratings on South Africa based- Industrial Development Corporation of South Africa (‘IDC’, ‘the entity’). The outlook has been revised to stable.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Industrial Development Corporation of South Africa Long Term Issuer National AA+(ZA) Stable
Short Term Issuer National A1+(ZA)

Rating Rationale

IDC’s financial profile is in the process of normalising post significant strain in 2020. However, the balance sheet remains structurally exposed to a volatile operating environment.

The strong level of capitalisation remains the corner stone of the IDC’s financial profile, a significant ratings positive and a strong mitigating factor to the structural weaknesses of the balance sheet and volatility caused by market sensitive changes. We expect the entity to maintain the highest levels of capitalisation over the next 12-18 months and beyond, due to management’s stated aim to maintain its debt to equity at below the 60% level.

The risk profile is a negative ratings factor, which is typical for a development led institution, due to its focus on high and early-stage credit risks and high market risk exposure through the entity’s sizeable listed and unlisted equity book. Operational risk and interest rate risks are well monitored and managed, exposing the IDC to limited risk. GCR also considers the significant listed and unlisted equity investments to be a source of risk.

The ratings on South African based IDC continue to 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 long-term track-record in fulfilling is mandate. How the bank responds to the current crisis and South Africa’s much needed economic recovery could change this assessment going forward.

The funding structure is a positive ratings factor, with good diversification by sources and counterparty. We also view positively the lack of funding covenant risk. 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.

Outlook Statement

The stable outlook balances our opinion that the high levels of bank capitalisation is unlikely to be materially eroded by the asset quality or equity investment risks that remain pressurised by the operating environment. We expect IDC’s capitalisation to remain around the 50% range over the next 12 months. We also expect continued asset quality pressure and potential volatility in the market value of the equity investments. Positively, liquidity and funding risks are being well managed, and refinancing dates are manageable within the next 6-12 months, therefore we don’t anticipate any significant problems (outside a complete market closure) over the short term. We also expect the IDC to further prove its mandate by continuing to finance and support the domestic industrial base of South Africa.

Rating Triggers

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, especially if they remain 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. An upgrade is considered unlikely over the short-term.

Analytical Contacts

Primary analyst Corné Els Senior Financial Institutions Analyst
Johannesburg, ZA CorneE@GCRratings.com +27 11 784 1771
Secondary analyst Matthew Pirnie Group Head of Ratings
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771
Committee chair Vinay Nagar Senior Financial Institutions Analyst
Johannesburg, ZA Vinay@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Financial Institutions, May 2019
GCR Rating Scales, Symbols & Definitions, May 2019
GCR Country Risk Scores, July 2021
GCR Financial Institutions Sector Risk Score, June 2021

Ratings History

Industrial Development Corporation of South Africa

Rating class Review Rating scale Rating class Outlook Date
Long Term Issuer Initial National AA+(ZA) Stable July 2017
Last National AA+(ZA) Negative July 2020
Short Term Issuer Initial National A1+(ZA) n.a. July 2017
Last National A1+(ZA) n.a. July 2020

Risk score summary

Rating Components & Factors Risk scores
Operating environment 12.0
Country risk score 6.5
Sector risk score 5.5
Business profile 3.0
Competitive position 3.0
Management and governance 0.0
Financial profile 1.5
Capital and Leverage 4.0
Risk (3.0)
Funding and Liquidity 0.5
Comparative profile 0.0
Group support 0.0
Government support 0.0
Peer analysis 0.0
Total Score 16.5

Glossary

Balance Sheet Also known as Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.
Capital The sum of money that is invested to generate proceeds.
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
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 See GCR Rating Scales, Symbols and Definitions.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
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 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 were 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 the rated entity.

The ratings were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

IDC participated in the rating process via teleconference 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 ratings included:

  • Other relevant information;
  • Ratings Results Presentation;
  • ALCO dashboard;
  • Breakdown of facilities available and related counterparties;
  • Industry comparative data.
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