Johannesburg, 18 Dec 2013 — Global Credit Ratings has today affirmed the long term national scale and the short term national scale issuer ratings assigned to Chellarams Plc of BB+(NG) and B(NG) respectively; with the outlook accorded as Stable. Concurrently, GCR has affirmed the Senior Unsecured Series 1 Bond rating of BB+(NG) and the Senior Unsecured Series 2 Bond rating of BB+(NG), with the outlooks accorded as Stable. The rating(s) are valid until 10/2014.
Global Credit Ratings has accorded the above credit rating(s) on Chellarams Plc based on the following key criteria:
Chellarams Plc is a large Nigerian conglomerate with competitive market shares across a diverse range of industries, primarily including chemical products and fast moving consumer goods (“FMCG”). Operations have consistently underperformed in recent years with revenue and earnings margins being erratic, due to a mix of external and internal factors. This has led to the restructuring or closure of certain business lines. Although an improved gross margin was reported in F13 (due to strong FMCG sales), increased operating expenses saw operating profit decrease to N688m (F21: N745m) and the operating margin remain low at 3%. Coupled with the higher net finance charge, interest cover declined to a low 1.5x in F13 and further to 1.4x in 1Q F14. The low interest coverage remains a serious concern and a major constraint on the rating.
Chellarams has historically evidenced large working capital absorptions, although a significant reduction in inventory and improvement in creditors’ terms led to a N3.2bn working capital release in F13. This, in turn, saw debt reduce from N8.9bn at FYE12 to N6.5bn at FYE13. In contrast, equity increased significantly to N4.5bn at FYE13 (FYE12: N3.1bn) due to a revaluation of assets (following the implementation of IFRS) and a 10% rise in retained earnings. Thus, net gearing more than halved to 133% at FYE13. While net debt to EBITDA also improved to 637%, it remains well above the level generally characteristic of investment grade companies.
Chellarams initiated a N5bn Domestic Medium Term Note Programme in 2011, and subsequently issued N1.5bn in Series 1 Bonds in January 2011 and N540m in Series 2 Bonds in February 2012. Both bond Issues are senior unsecured obligations and rank pari passu with each other and with all other senior unsecured debt. Being senior unsecured debt, the ratings accorded are intrinsically linked to the unsecured corporate rating, and will fluctuate in line with changes to the Issuer rating.
Positive rating action is dependent on Chellarams’ ability to generate revenue and profit growth across the group. A reduction in earnings based gearing below the 300% level and an increase in interest coverage to 2.5x would be more in line with investment grade companies and could lead to a rating upgrade. Conversely, continued flat earnings and a further deterioration in gearing metrics will likely lead to a downgrade.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Aug/2010)|
|Long term: BBB-(NG); Short term: A3(NG)|
|Last rating (Nov/2012)|
|Long term: BB+(NG); Short term: B(NG)|
|Senior Unsecured Series 1 Bond: BB+(NG)|
|Senior Unsecured Series 2 Bond: BB+(NG)|
|+23 41 462-2545|
|Sector Head: Corporates and Public Sector|
|+27 11 784 1771|
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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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
Chellarams Plc 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 rating/s has been disclosed to Chellarams Plc with no contestation of the rating.
The information received from Chellarams Plc and other reliable third parties to accord the credit rating included the March 2013 audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, revised budgeted financial statements for the period 2014-2019, year to date management accounts covering 1Q F14, corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.
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.