Johannesburg, 12 Mar 2014 — Global Credit Ratings has today affirmed the long term and the short term national scale issuer ratings assigned to JD Group Limited of A(ZA) and A1(ZA) respectively; with the outlook accorded as Negative.
Global Credit Ratings has accorded the above credit rating(s) on JD Group Limited based on the following key criteria:
JD Group Limited (“JDG”) reported poor interim results since GCR’s last full review in October 2013, due to a substantial increase in debtors charges. This followed the continued deterioration in market conditions, which has seen stagnant top line sales and operating profits reported, and has further impacted the performance of JDG’s loan book. To address this, JDG had already begun to reduce disbursements under personal loans to levels below collections in 2013, and has now decided to halt origination of all personal loans. Additionally, JDG has rebased its provisioning/write-off policy to reflect the sharp deterioration in the operating environment and better reflect the economic reality. Together with the deterioration in debtors’ performance, the change in policy saw the group report higher debtors’ charges of R1.1bn for the 1H F14 interim period (1H F13: R345m), driving a R135m retained loss for the period.
The weak performance has coincided with JDG’s record levels of debt and gearing, following its borrowing for several initiatives (the implementation of centralised distribution, the rollout of new IT systems and the growth of the personal loans book). Thus, JDG reported a material worsening of credit projection measures as at the 1H F14 interim period. In mitigation of this development, however, is the fact that the group has completed debt-funded initiatives, and has no plans to raise further debt in the medium term. Moreover, JDG plans to undertake a R1.5bn rights issue, with Steinhoff agreeing to follow its rights and underwrite the issue if needed. The proceeds of the rights issue are to be used solely for the redemption of interest-bearing debt. Applying such funds to equity and debt at 1H F14 retrospectively, GCR has computed that net gearing and net debt to EBITDA would register below 100% and 200% respectively.
From an operational perspective, JDG is in a more stable position than previously, having implemented new systems and completed major corporate restructuring and acquisitions. The challenges it faces now are those systematically impacting the retail sector, being the weak economy, high unemployment and rising household indebtedness, all manifesting in consumers being under duress. As performance across the sector and for JDG is expected to be flat over the medium term, any upward ratings movement is considered unlikely until such time as market conditions improve. Conversely, failure to complete the rights issue and redeem debt as indicated could trigger negative ratings action. However, GCR considers a decline in net debt of around R2.5bn to be more appropriate and, to the extent that a further deterioration in the operating environment or other problems affect cash flows, negative action may be taken.
Readers are further advised that the outlook 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: Negative
JDG03, R450m – A(ZA), Outlook: Negative
JDG04, R300m – A(ZA), Outlook: Negative
NATIONAL SCALE RATINGS HISTORY
Initial rating (Jun/2000)
Long term: A(ZA); Short term: A1(ZA)
Last rating (Oct/2013)
Long term: A(ZA); Short term: A1(ZA)
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
GCR’s Global Master Criteria for Rating Corporate Entities
JDG Rating Reports, 2000-2013
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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 included the latest available audited annual financial statements (plus four years of comparative numbers), internal and/or external management reports, full year budgeted financial statements, 1H F14 interim results, 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.