Lagos Nigeria, 12 November 2018 — Global Credit Ratings has affirmed the national scale ratings assigned to C&I Leasing Plc of BBB(NG) and A3(NG) in the long term and short term respectively, with the outlook accorded as Stable. The ratings are valid until October 2019.
Global Credit Ratings (“GCR”) has accorded the above credit ratings to C&I Leasing Plc (“C&I” or “the Group”) based on the following key criteria:
C&I maintains its well-entrenched position in key markets, supported by a relatively strong client retention amidst challenging operating conditions. Its increased focus on strongly performing segments, particularly in the Nigerian oil and gas sector, has also supported sound growth in the operating lease space, with performance expected to show resilience through the cycle.
Revenue has increased consistently over the review period, supported by expansion in the leasing and outsourcing businesses. Despite relatively higher operating expenses, associated with growth in FY17, the EBITDA margin widened to 39% (review period average of 30%) due to economies of scale. Although the position moderated in 1H FY18, the margin is budgeted to remain around 39% going forward. Nevertheless, given the customer base, the performance of the leasing book is now highly correlated with the volatile oil and gas sector.
Credit quality appears to be under pressure, with the gross impaired receivables’ ratio remaining high at 16.9% at FY17 despite a substantial write-off during the year. As this continues the negative trend evidenced since FY14, GCR believes there is a need for C&I to further strengthen its internal recovery mechanisms in order to reduce credit risk.
C&I has evidenced large working capital absorptions over the review period, reflecting the consistent growth in the operating leases, as well as pressure from loans and receivables. Despite this and the high interest cost outlay, operating cash flow has been positive in most years, but debt funding has been required to meet the investment in new leasing assets.
Gross debt rose from N11bn at FY13 to N35bn at 1H FY18, with gross and net gearing having registered at over 400% since FY15 (1H FY18: 409%). While higher earnings saw net debt to EBITDA moderate to 351% at FY17 (1H FY18: 379%), the relatively high level combined with interest cover below 1.5x, suggests little headroom to absorb earnings fluctuations. Thus, gearing remains a constraint on the rating.
The short term nature of much of the debt raises a liquidity concern, as its inconsistent with financing medium to long term leasing assets creates potential for liquidity pressure. However, some comfort is taken from the unutilised portion of the funding facilities which is considered sufficient to cover short term maturities and projected asset growth.
In line with the nature of business, C&I is thinly capitalised but plans to bolster equity through new share capital are favourably viewed. This should result in a more balanced funding profile, and provide a firmer capital base for anticipated future growth.
An upward movement in the rating may follow a more balance funding profile that sees gearing metrics reduced. A sustained improvement in profitability over the medium-term would also support firmer credit protection metrics. Conversely, weaker profitability, due to internal or external factors, would see credit protection metrics come under severe pressure, triggering a negative rating action. Further large provisions or impairments would suggest weak credit granting policies.
NATIONAL SCALE RATINGS HISTORY
Initial rating (June 2006)
Rating outlook: Stable
Last rating (November 2017)
Rating outlook: Stable
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Corporate Finance and Leasing Companies, updated March 2017
Global Master Criteria for Rating Corporate Entities, updated February 2018
C&I rating reports (2006-17)
Glossary of Terms/Ratios, February 2017
RATING LIMITATIONS AND DISCLAIMERS
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; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The ratings were solicited by, or on behalf of, C&I Leasing Plc, and therefore, GCR has been compensated for the provision of the ratings.
C&I Leasing Plc participated in the rating process via face-to-face management meetings and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings above were disclosed to C&I Leasing Plc.
The information received from C&I Leasing Plc and other reliable third parties to accord the credit ratings included:
• the latest audited annual financial statements at 31 December 2017 (plus four years of comparative numbers);
• latest internal and/or external auditor’s report to management;
• full year detailed budget for 2018;
• Management accounts to 30 June 2018; and
• Information specific to the rated entity and/or industry.