Johannesburg, 1 April 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to JD Group Limited of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable. Readers are further advised that the outlooks on related issue ratings under JDG’s domestic medium term note programme have been affected by the above rating action, as follows:
JDG01, R1bn – A(ZA), Outlook: Stable
JDG03, R450m – A(ZA), Outlook: Stable
JDG04, R300m – A(ZA), Outlook: Stable
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to JD Group Limited based on the following key criteria:
In 1H F15, JDG accepted an offer to sell its consumer finance division (excluding the insurance operations), prompting GCR to put the group’s national scale ratings on an “Evolving” Outlook; pending confirmation of the deal and the specifics thereof. This deal has been confirmed, and the purchaser disclosed as RCS Cards (Pty) Limited (“RCS Cards”), a subsidiary of BNP Paribas. The business has been written down to its net asset value of R4.7bn (the effective sale price), and the sale is expected to become effective from 1 May 2015.
The disposal (driven by the large losses reported by the division) is expected to have myriad benefits for the group, including the removal of loss-making operations and a large decrease in debt funding requirements. Concern, however, exists in terms of the potential impact of the disposal on retail sales volumes, as JDG will not be in control of credit origination, which is essential to facilitating certain retail sales. As such, JDG has entered into a “Commercial Agreement” with RCS Cards, which will enable it to compel RCS Cards to originate credit to its customers (with JDG providing an ROE guarantee in return). This agreement will endure for an initial firm period of ten years, plus a five-year renewal period, although it will include an agreed cancellation clause should RCS Cards’ product offering become uncompetitive.
JDG reported large retained deficits of R2bn and R1.5bn in F14 and 1H F15 respectively, due to the losses from discontinued operations. Although core retail and automotive operations have also come under pressure, with operating income waning from R1.6bn in F13 to R1bn in F14, operating income improved to R0.8bn for the 1H F15 period (1H F14: R465m). As such, net interest cover reduced from 9.5x in F13 to 4.9x in F14, but strengthened to 6.5x in 1H F15 (1H F14: 3.3x).
The group reported a sharp rise in debt from R4.6bn at FYE12 to R7.8bn by FYE13. While debt has reduced somewhat since (FYE14: R6.7bn; 1H F15: R7.2bn), eroded equity and depressed earnings have seen credit risk metrics spike; with net gearing and net debt to EBITDA reported at 190% and 291% at 1H F15 (FYE14: 122% and 381%). However, much of this debt was used to fund the consumer finance book, and a large proportion of it will be settled with the proceeds from the consumer finance division’s sale. Moreover, significant third party debt has been refinanced with bridge loans from Steinhoff Holdings Limited, JDG’s majority shareholder. Shareholder loans amounted to R4bn at 1H F15, or 55% of the total, and if excluded net gearing and net debt to EBITDA would have amounted to 63% and 97% at 1H F15. The group intends to use the proceeds from the disposal of the consumer finance division to repay its shareholder loans, and intends to repay other debt instruments (mainly listed bonds) as they mature.
The weak domestic economy is reporting low growth, exacerbating structural unemployment. This has been compounded by the current electricity crisis and weak exchange rate, resulting in elevated consumer duress. While the fall in global oil prices has provided a temporary fillip to retailers, inflationary pressures continue to build. As such, upward rating movement is only likely once the relationship with RCS Cards has been bedded down, proving the viability of the arrangement. This upward movement would also be predicated on the sustained support of Steinhoff, as well as on an improvement in the domestic operating environment and retail conditions in particular. Failure to complete the sale of the consumer finance division would leave JDG highly indebted, with a continued high credit risk exposure to consumer debt. If this occurs, or revenue is materially impacted by the new relationship with RCS Cards, negative ratings action could occur.
NATIONAL SCALE RATINGS HISTORY
Initial rating (June 2000)
Long term: A(ZA)
Short term: A1(ZA)
Last rating (October 2014)
Long term: A(ZA);
Short term: A1(ZA)
Sector Head: Corporate & Public Sector Debt Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2015
|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.|
|Exchange Rate||The value of one country’s currency expressed in terms of another.|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|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.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
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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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
JD 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 JD Group Limited with no contestation of the rating.
The information received from JD Group Limited and other reliable third parties to accord the credit rating(s) included the audited annual financial statements for the year ended 30 June 2014 (plus four years of comparative numbers), the 2014 Integrated Report, and 1H 2015 unaudited interim results, as well as the 2015 and medium term budgeted financial statements.
The ratings above were solicited by, or on behalf of, JD Group Limited, and therefore, GCR has been compensated for the provision of the ratings.