Announcements

GCR affirms JD Group Limited’s rating of A(ZA); Outlook Evolving

Johannesburg, 4 Nov 2014 — 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 ‘Evolving’

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to JD Group Limited (“JDG”) based on the following key criteria:

The acquisition of Unitrans Automotive and other African retail assets of Steinhoff International Holdings Limited (“Steinhoff”) in 2011 markedly increased the scale and scope of JDG’s operations, and saw Steinhoff become JDG’s majority shareholder. Following a rights issue in 2H F14 and the buyout of most minorities, Steinhoff’s beneficial interest in the group has risen to 86% (net of treasury shares), with Steinhoff becoming increasingly involved in the business in terms of financing, strategy and management support.

JDG reported weak results in F13 and a large R1.9bn retained loss in F14, being mostly a function of the deterioration in the quality of the loan book; which resulted in debtor charges of R3.3bn in F14 (F13: R914m). As such, JDG has accepted an offer (subject to a due diligence and conditions precedent) to sell the finance division (excluding the insurance business) to a third party, with this division classified as a discontinued operation and the sale expected to be completed by 1H F15. The sale of the finance division would remove exposure to consumer credit risk and potential losses stemming therefrom, as well as reduce the group’s working capital burden. However, the sale will lower the group’s operating margin, and in favourable conditions JDG will no longer benefit from the finance income earned from lending activities. Moreover, JDG’s retail customers will still require credit to purchase durables, and the group’s business volumes could be affected by the level of origination undertaken by the third party financier. However, management intends to manage this risk and other related concerns through a comprehensive commercial agreement with the purchaser.

The poor operating results were compounded by the fact that the group’s debt rose sharply over the five-year review period, much of which was raised to fund lending activities. Specifically, interest-bearing debt increased from R1.4bn at FYE10 to R6.7bn at FYE14 (FYE13: R7.8bn), which saw net debt to equity and net debt to EBITDA spike to 122% and 381% respectively at FYE14. In mitigation, much of this debt is now provided by Steinhoff, while the sale of the finance division is expected to enable JDG to significantly reduce its borrowings and gearing over the next three years. The evolving outlook accorded by GCR reflects the various uncertainties relating to the sale of the consumer finance division (with exact terms and conditions yet to be agreed, and significant uncertainty as to how the retail business will operate in the future), as well as the changing dynamic of the group’s relationship with Steinhoff.

The sale of the consumer finance division and repayment of a significant portion of debt funding, if concluded, would reduce the group’s short term financial risk and remove a large source of uncertainty going forward. This aside, ongoing support from Steinhoff and the successful implementation of an internal growth strategy would bode positively for JDG’s credit risk profile. In contrast, the failure to sell the consumer finance division or significant operational/cultural clashes with the third-party financier could have severe adverse credit risk ramifications for the group; particularly if domestic economic conditions remain weak. This, or a material decrease in support from Steinhoff, could drive a downward rating movement.

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: Evolving

JDG03, R450m – A(ZA), Outlook: Evolving

JDG04, R300m – A(ZA), Outlook: Evolving

NATIONAL SCALE RATINGS HISTORY

Initial rating (Jun/2000)
Long term: A(ZA); Short term: A1(ZA)
Outlook: Stable

Last rating (Mar/2014)
Long term: A(ZA); Short term: A1(ZA)
Outlook: Negative

ANALYTICAL CONTACTS

Primary Analyst
Richard Hoffman
Analyst
(011) 784-1771
Hoffman@globalratings.net

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

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Corporate Rating Criteria, Updated August 2014
JD Group (“JDG”) Rating Reports, 2000-2014

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.

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 2014 audited annual financial statements (plus four years of comparative numbers), the draft Integrated Report, internal and/or external management reports, 2015 and medium term budgeted financial statements, corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of debt facilities.

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 REPORT

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.

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.

Operating Margin

Operating margin is operating profit expressed as a percentage of a company’s sales over a given period.

Operating Profit

Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.

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.

Working Capital

Working capital usually refers to net working capital and is the resource that a company uses to finance day-to-day operations. It is calculated by deducting current liabilities from current assets.

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