Johannesburg, 31 January 2018 – Global Credit Ratings has affirmed the national scale debt ratings for ARM Cement Limited of BB(KE) and B(KE) in the long term and short term respectively. Concurrently the Commercial Paper rating has been affirmed at B(KE). The ratings have been placed on ‘Rating Watch’ and are valid until July 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to ARM Cement Limited (“ARM”) based on the following key criteria:
GCR downgraded ARM’s credit rating in July 2017, as a result of the substantial financial strain that had materialised. This was largely due to the operating losses sustained in the Tanzanian cement market and the decrease in cement demand in Kenya ahead of the 2017 presidential elections. This transpired in the substantial KES1.4bn operating loss reported by ARM in 1H FY17, whilst debt remained excessively high at around USD130m. Thus, despite the recapitalisation in FY16, ARM remains in a precarious financial position.
To restore financial sustainability to the group, ARM outlined a number of initiatives to refinance the substantial short term debt burden and raise additional capital for the business. GCR thus placed the rating on ‘Rating watch’ due to the fluid position of ARM and the possibility for both positive and negative movements in the short term. In recent engagements with GCR, ARM’s management indicated that plans to both introduce a new strategic investor and to restructure debt group are advancing as per expectations. Nevertheless, no timeline for the conclusion of negotiations has been provided.
Positively, the sale of the non-cement business has received approval from the necessary regulatory authorities, as well as ARM shareholders and will likely be finalised mid-February 2018. ARM will receive USD16m from the sale, which will be directed to settle a portion of the outstanding debt.
ARM indicated that it would likely take six months or more until and funds are received from the larger refinancing initiatives. In the interim, management is focussed on returning operations to profitability. In this regard, ARM saw somewhat of a recovery towards year-end 2017 and into 2018. Cement prices in Tanzania have increased (albeit remaining below the regional average) and the clinker plant is able to operate at higher capacity, due to rising clinker sales to other cement companies and more stable coal supply. In Kenya, demand has begun to recover following the resolution of the presidential election. Thus delayed infrastructure projects are again gaining momentum, and payments have been received from the Government of Kenya for outstanding invoices.
Despite some positive developments, there remains substantial downside risks for ARM, which need to be monitored. Accordingly, the ratings remain on ‘Rating Watch’ and will be reviewed by July 2018. In this regard, any delays in reaching a refinancing arrangement will likely result in continued liquidity constraints, which would prejudice ARM’s ability to meet debt obligations and thus lead to a further rating downgrade. Continued poor earnings performance will also impact sustainability.
Over the longer term, positive rating movement is conditional on the finalising of equity transaction and debt restructuring agreements, such that ARM is restored to sustainable funding structure. A sustained return to profitability is also a necessary condition for positive rating migration.
| NATIONAL SCALE RATINGS HISTORY | |
| Initial Rating (October 2001) | Last Rating (July 2017) |
| Long term: BBB(KE) | Long term: BB(KE) |
| Short term: A3(KE) | Short term: B(KE) |
| Rating outlook: Stable | Commercial paper: B(KE) |
| Commercial paper: n.a | Rating outlook: Rating Watch |
ANALYTICAL CONTACTS
| Primary Analyst |
| Eyal Shevel |
| Sector Head: Corporate and Public Sector Ratings |
| (011) 784-1771 |
| shevel@globalratings.net |
| Committee Chairperson |
| Patricia Zvarayi |
| Senior Credit Analyst |
| (011) 784-1771 |
| Patricia@globalratings.net |
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2017
ARM Cement rating reports (2001-2017)
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.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S Corporates 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. |
| Cash Flow | The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities. |
| Corporate Governance | Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders. |
| 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. |
| 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. |
| Margin | A term whose meaning depends on the context. In the widest sense, it means the difference between two values. |
| Net Profit | Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees. |
| Redemption | The repurchase of a bond at maturity by the issuer. |
| 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. |
| 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. |
| Working Capital | Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances. |
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 an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
ARM Cement 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 ARM Cement Limited with no contestation of the ratings.
The information received from ARM Cement Limited and other reliable third parties to accord the credit ratings included;
- Audited financial results of the Company per 31 December 2016
- Four years prior audited financial statements
- Interim accounts for 1H FY17
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 ARM Cement Limited’s rating at BB(KE); Rating Watch.
