Announcements

GCR affirms Gijima Group Limited’s rating of BB(ZA); Outlook Stable.

Johannesburg, 12 Dec 2014 — Global Credit Ratings has today affirmed the national scale ratings accorded to Gijima Group Limited of BB(ZA) and B(ZA) in the long and short term respectively; with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Gijima Group Limited (“Gijima”) based on the following key criteria:

Gijima has underperformed the market in recent years, being impacted by non-renewals and loss making contracts. This saw revenue decline by 50% over the review period. As part of its turnaround strategy, substantial changes were made to the management team in F14. This helped the group achieve its target of R200m in annual cost savings, although a loss making project (R64m) and other non-recurring expenses saw the group report an EBITDA loss of R89m in F14 (F13: R245m).

Retained losses have substantially eroded Gijima’s equity since FYE10, with negative tangible shareholders’ equity being reported at FYE14. Additionally, Gijima breached a covenant under its securitisation in F14. This was condoned by the funders and repayment terms renegotiated, extending the start of debt redemptions to June 2017. The group took further substantial action to increase its balance sheet strength by announcing a further R100m rights offer, fully underwritten by the major shareholder. The extended payment dates and rights issue should provide the company with sufficient leeway over the next 12-24 months, until operations return to profitability, while comfort is taken from continued shareholder support.

Evidencing some traction in the market, Gijima renewed R1.6bn in annuity contracts in F14 and was able to retain virtually all private sector clients. In addition, tenders to the value of R1.2bn have been submitted, compared to R300m at the same time last year, suggesting strong opportunities. However, it will likely take up to 18 months for financial benefits to flow through, once contracts are awarded.

Positive rating action will be dependent upon the successful execution of the turnaround strategy, resulting in a return to consistent profitability. Further to this, a demonstrated ability to secure new clients and contracts, as well as a rise in shareholders’ equity through retained earnings could impact the rating positively. Further earnings losses would bode negatively for the group’s ability to trade out of the current weak financial position. An inability to properly manage the debtors’ book could result in working capital pressure and thus increase gearing, putting downward pressure on the rating.

NATIONAL SCALE RATINGS HISTORY

Initial rating (Aug/2008)
Long term: BBB(ZA); Short term: A3(ZA)
Outlook: Stable

Last rating (Nov/2013)
Long term: BB(ZA); Short term: B(ZA)
Outlook: Negative

ANALYTICAL CONTACTS

Primary Analyst
Farai Mauchaza
Junior Analyst
(011) 784-1771
Faraim@globalratings.net

Secondary Analyst
Eyal Shevel
Sector Head: Corporate & Public Sector Debt Ratings
(011) 784-1771
Shevel@globalratings.net

Committee Chairperson
Richard Hoffman
Senior Analyst
(011) 784-1771
Hoffman@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated August 2014
Gijima Group Limited Rating Reports, 2008-2013

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; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Gijima Group 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 rating/s has been disclosed to Gijima Group Limited with no contestation of the rating.

The information received from Gijima Group Limited and other reliable third parties to accord the credit rating(s) included the 2014 audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, full year budgeted financial statements, most recent year to date management accounts (where necessary), corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available.

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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE 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.

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 Risk

The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.

EBITDA

Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.

Liquidity Risk

The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.

Rights Issue

One of the ways that a company can raise additional funds is to issue new shares. These must be first offered to current shareholders and a rights issue allows a shareholder to buy shares in proportion to the number already held.

GCR affirms Gijima Group Limited’s rating of BB(ZA); Outlook Stable.

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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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