Johannesburg, 05 Dec 2018 — Global Credit Ratings has today affirmed the national scale Issuer rating assigned to enX Leasing Investments Proprietary Limited at BBB(ZA) in the long term and A3(ZA) in the short term; with the outlook accorded as Evolving.
Concurrently, the ratings for enX Leasing Investments Proprietary Limited have been withdrawn for business reasons.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to enX Leasing Investments Proprietary Limited’s (“enX Leasing”) based on the following key criteria:
The credit rating is supported by the strong underlying equipment and fleet management businesses. In particular, enX Industrial Equipment (“EIE”) has a leading market share in the South African market, built on its exclusive distribution of Toyota Forklifts. Whilst the weak operating environment has curtailed growth, EIE’s control of the entire value chain, with the c.60% annuity earnings, has sustained a stable performance. enX Fleet Management and Logistics (“FML’) has a strong product offering, underpinned by a range of value-add products and a proprietary fleet management system. However, FML operates in a highly competitive industry, with some very large players. The sustainability of IE and FML’s annuity income is underpinned by their high quality client bases, comprising predominantly of blue chip groups. Notwithstanding greater pressure amidst the current weak economy, both businesses report low bad debt write-offs of around 1% of revenue.
The Evolving outlook reflects the potential sale of the FML business, which would result in the size of enX Leasing and enX Group decreasing substantially, but with stronger market positions in the remaining business. As the sale would likely trigger a mandatory redemption of the existing debt, GCR does not expect the transaction to proceed if it would prejudice shareholders or debtors, it does add uncertainty to the outlook.
Group operating performance was slightly weaker in FY18. Although strong growth was reported, this was the result of the EIE and FML businesses being included for a full 12 months in FY18 (compared to 10 in FY17). On an annualised basis, earnings were flat, while there was some narrowing in the operating margin across all businesses.
GCR positively considers the strong cash flow from operations reported in FY17 and FY18, which is supported by inflows from the sale of vehicles. However, after recognising the impact of maintenance capex (which is critical for the business), the ratio of discretionary cash flow to debt was just 13.4% in FY17 and 20% in FY18, which GCR considers to be low.
The rating takes cognisance of the improvement in gearing metrics for the group as a whole, and for enX Leasing in particular. At the group level, net debt to EBITDA declined to 225% (FY17: 265%), which GCR considers to be relatively moderate, albeit net interest coverage is fairly weakly positioned at 2.1x.
enX has demonstrated an ability to steadily reduce the debt within enX Leasing’s South African operations, as well as to refinance maturing facilities. While the debt facilities do encompass fairly rigorous covenants, enX Leasing has met these covenants in all periods under review, with increasing headroom. Based on cash flow forecasts provided, with some additional stresses, GCR does not expect the covenant levels to be tested over the next 12 months. Following some refinancing arrangements, only R385m remains to be refinanced in FY19, which is comfortably covered by committed bank facilities in excess of R700m.
Positive rating movement could derive from the successful sale of the indicated operations that results in the deleveraging of the remaining operations. In the absence of an asset sale, the deleveraging of the group and/or demonstrated earnings growth could lead to positive rating action. Conversely, continued high, gearing metrics, post the sale of operations would be negatively viewed. An earnings underperformance would also be negatively viewed.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2016)||Last rating (November 2017)|
|Long term: BBB(ZA); Short term: A3(ZA)||Long term: BBB(ZA); Short term: A3(ZA)|
|Outlook: Stable||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 2018
enX Leasing Investments Propriety Limited rating reports, 2016 and 2017
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
|Debt||A bad debt is an amount owed by a debtor that is unlikely to be paid due, for example, to a company going into liquidation. There are various technical definitions of what constitutes a bad debt, depending on accounting conventions, regulatory treatment, and the individual entity’s own provisioning and write-off policies.|
|Bond||A long term debt instrument issued by either a company, institution or the government to raise funds.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|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.|
|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.|
|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.|
|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.|
|Preference Share||Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.|
|Redemption||The repurchase of a bond at maturity by the issuer.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|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.|
|Syndicated Loan||A large loan arranged by a group of funders, usually international banks that form a syndicate, headed by a lead manager.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating 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; c.) such ratings were was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
enX Leasing Investments Proprietary Limited 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 enX Leasing Investments Proprietary Limited.
The information received from enX Leasing Investments Proprietary Limited and other reliable third parties to accord the credit ratings included:
- Audited Financial Statements for the years to 31 August 2017 and 2018
- Cash flow forecasts for enX Group
- Full details of the funding facilities
- enX Corporation syndicated loan information documents
- Relevant analyst presentations
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 affirms and withdraws enX Leasing Investments Proprietary Limited’s rating of BBB(ZA); Outlook Evolving