Johannesburg, 29 June 2018 – Global Credit Ratings has affirmed national scale ratings accorded to ASL Credit Limited of
BBB-(KE) and A3(KE) in the long and short term respectively. Concurrently the Commercial Paper rating of A3(KE) was also affirmed. The ratings have been accorded a Stable outlook, and are valid until June 2019.
SUMMARY RATINGS RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to ASL Credit Limited (“ASL Credit”, “the company”) based on the following key criteria:
The ratings of ASL Credit reflect its sound asset quality as well as acceptable returns constrained by an unstable liquidity profile, moderate capitalisation, and small size relative to larger peers in the banking sphere. Furthermore, the company’s short-term funding structure, particularly reliance on commercial bank funding and related facilities has a strain on funding stability. GCR also takes note of the high probability of repayment risk although, assurance is gained from the short-term nature of the loan book and a track record of bank support thus mitigating liquidity risk.
ASL Credit is part of the Ramco Group, a privately-owned group of 40 companies across four East African countries and services the niche sector of hire purchase, financing assets, and new and used vehicle purchases. While each division within the broader group is separately managed, ASL Credit is able to exploit the operational synergies across the Ramco group of companies’ entrenched supply chain, as well as the cost savings from a wide range of shared services. This however, has a neutral impact on the ratings.
Unlike banks that have access to cheaper funding in the form of deposits to support lending activities, ASL Credit is principally funded by relatively expensive debt and capital market instruments (medium terms notes and commercial paper), representing 45.2% of total funding at FY17. Debt repayments are supported by monthly repayments of hire purchase loans augmented by revolving liquidity facilities from commercial banks negotiated annually. However, debt payback ratios are low, evidenced by funds from operations/net debt ratio of 3.0% at FY17 (FY16: 2.0%). Liquidity risks are somewhat mitigated by the short-term loan book, but this exposes the company to repayment risk. Liquidity management would benefit from lower funder and maturity concentration going forward.
ASL Credit’s capital/assets ratio improved to 15% at FY17 (FY16: 13.3%). The company’s gearing ratio decreased to 1:5.57 at FY17 (FY16: 1:6.46). The decline was as a result of a decrease in borrowings and increase in cash and cash equivalents during the year. Leverage (for external borrowing) ratio for the company internal guideline, is 1:5 basis as prudent. At FY17, the leverage ratio was 1:4.2 (FY16: 1:4.4).
Early (<90 days) arrears/past due but not impaired loans increased to 6.9% of gross loans at FY17 (FY16: 2.2%) as they relate to few customers for whom there is no recent history of default. Without effective management, arrears may increase in FY18. Despite the increase in non-performing loans (“NPLs”) at FY17 specific provisions fully covered the non-performing portfolio. Notwithstanding this, IFRS 9 (the impact of which is still being evaluated), is expected to lead to higher provisioning and earlier recognition of credit losses. GCR positively notes ASL Credit’s very low gross NPL ratio of 1.7% at FY17 (FY16: 1.4%).
Profit before tax grew by 7% in FY17 (FY16: 2% decrease) mainly due to 26.5% growth on net interest income. Interest income increased by 6.9% driven by higher interest rates earned on hire purchase loans and also an increase in the customer portfolio. The company is highly dependent on net interest income as a dominant revenue stream (94.9%). EBITDA grew at a higher margin of 75.8% (FY16: 72.7%). This was mainly due to the higher revenue, which was not matched by a commensurate increase in costs. Cost discipline is expected to support sustainable increases in the EBITDA margins coupled by revenue growth. The ability of the company to service debt as measured by the interest coverage ratio improved marginally to 1.22x in FY17 (FY16: 1.23x).
A more diversified long-term funding structure, coupled with improvement in liquidity could improve the rating. The ratings could be negatively affected if there is an increase in short-term funding, less funding stability coupled by weaker liquidity or if maintained at current levels all else being even.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/Last rating (June 2017)|
|Long-term: BBB-(KE); Short-term: A3(KE)|
|Credit Analyst: Financial Institution Ratings|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Global Criteria for Rating Finance and Leasing Companies, updated March 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.
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 was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
ASL Credit 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 ASL Credit Limited with no contestation of the rating.
The information received from ASL Credit Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results of ASL Credit Limited to 31 December 2017 (plus four years of comparative numbers);
- Budgeted financial statements for 2018;
- Latest internal and/or external audit reports to management;
- A breakdown of facilities available and related counterparties; and
- Reserving methodologies and capital management policy.
The ratings above were solicited by, or on behalf of, ASL Credit Limited, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|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||Funds that can be readily spent or used to meet current obligations.|
|Cash Equivalent||An asset that is easily and quickly convertible to cash such that holding it is equivalent to holding cash.|
|Commercial Paper||CP is a negotiable instrument with a maturity of less than one year.|
|Credit Rating Agency||An entity that provides credit rating services.|
|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.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long-Term||Not current; ordinarily more than one year.|
|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||The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|National Scale Rating||Provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Overdraft||When the amount of money withdrawn from a bank account is greater than the amount actually available in the account, the excess is known as an overdraft, and the account is said to be overdrawn.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
For a detailed glossary of terms please click here
GCR affirms ASL Credit Limited rating of BBB-(KE); Outlook Stable.