Johannesburg, 15 December 2017 – Global Credit Ratings has today affirmed Kenya Kazi Limited’s national scale long term debt rating of BBB(KE) and a national scale short term debt rating of A3(KE). A stable rating outlook has been accorded to the ratings. The Issuer ratings for Kenya Kazi Limited are valid until October 2018.
Concurrently, GCR has affirmed GardaWorld Kenya’s medium term note (“MTN”) programme’s national scale long term debt rating of BBB(KE), with a stable outlook. The medium term note programme’s rating is valid until October 2018.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Kenya Kazi Limited (“KK”) and the GardaWorld Kenya Limited (“GWK”) MTN programme based on the following key criteria:
The ratings reflect KK’s entrenched position as a leading East African security services provider, underpinned by extensive operating infrastructure. This has ensured a quality client base dominated by government embassies, non-governmental organisations, multinational corporates and myriad private institutions in the region. GCR has considered the acquisition of a 100% interest in KK by global security firm GardaWorld Security Corporation (“GardaWorld”) in December 2016 in support of the ratings, with cognisance taken of the potential for enhanced competitive advantages accruing from the relationship in the form of financial, operational and technical support.
Although revenue and EBITDA have shown a strong positive trend over the review period, revenue declined by 10% to KES9.0bn in FY17, whilst EBITDA fell 5% to KES649m, amidst a slowdown in business activity and heightened competitive pressures in Kenya, which saw KK losing key contracts. Similar conditions have led to a further decline in earnings into FY18, but KK is confident that growth will increase over the medium term as there are several large contracts under discussion. While the EBITDA margin has shown relative resilience, exceeding 7% in most years under review, write downs, intermittent foreign exchange losses and tax inefficiencies arising from the group’s complex corporate structure has resulted in an erratic profit trajectory, with net losses reported in three years, including FY17.
KK has evidenced fairly weak discretionary cash flows due to working capital absorptions, sizeable interest costs and an inefficient tax structure. Less onerous working capital resulted in a moderate improvement in FY16 and FY17, but GCR would expect enhanced working capital management to stabilise free cash flows when the environment recovers.
Debt increased from KES747m in FY13 to KES1.7bn in FY16 to fund expansion. However, “GWK” has since provided KES600m in intercompany loans to settle a portion of the debt, with debt declining to KES1bn at 1H FY18. While net debt to EBITDA moderated to 161% at FY17, if adjusted to include intercompany loans the metric remains above 200%, in line with FY16 and FY17. Interest cover fell to 2.2x at FY17 (FY16: 2.9x) and does not offer headroom for a continued decline in earnings. Positively, raising the funding through GWK has allowed KK to lengthen its debt profile, given the 5-year term on the GWK notes.
Although aggressive competition in the industry continues to place downward pressure on pricing, growing security requirements across the region, coupled with GardaWorld’s entrenched global relationships present the key revenue growth areas for KK in the medium term.
As GWK’s sole asset is its 100% stake in KK, its financial strength is directly determined by, and commensurate with, the financial strength of KK.
Looking ahead, sustained growth in net profits and cash, driving improved debt serviceability, as well as further support from GWK in easing the debt burden, would bode positively for the ratings in the medium term. Conversely, the loss of major contracts could drive depressed earnings and thus impact debt serviceability, and may warrant negative ratings action.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating||Last rating|
|Kenya Kazi Ltd (September 2016)||Kenya Kazi Ltd (November 2016)|
|Long term: BBB(KE); Short term: A3(KE)||Long term: BBB(KE); Short term: A3(KE)|
|Outlook: Positive||Outlook: Stable|
|GardaWorld Kenya (November 2016)|
|MTN programme: BBB(KE)|
|Primary Analyst||Committee Chairperson|
|Eyal Shevel||Sheri Few|
|Sector Head: Corporate & Public Sector Debt Ratings||Senior Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2017
Kenya Kazi Limited rating reports, September 2016
Gardaworld Kenya Limited Bond Issuance Programme-Indicative Report, November 2016
GardaWorld Kenya Limited’s MTN programme indicative rating announcement, 7 November 2016
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.
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Commercial Paper||Commercial paper is a negotiable instrument with a maturity of less than one year.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Economies Of Scale||Economies of scale are the cost advantages of an increase in output if the fixed costs of doing so, such as those for plant and equipment, remain the same. The marginal cost, or the cost of the last unit of production, falls as output is raised.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|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.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Pari Passu||Securities issued with a pari passu clause have rights and privileges that are equivalent to those of existing securities of the same class. Pari passu means ‘with equal step’ in Latin.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|Refinancing||The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
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.
Kenya Kazi Limited participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Kenya Kazi Limited with no contestation of the rating.
The information received from Kenya Kazi and other reliable third parties to accord the credit ratings included:
- 2017 Annual Financial Statements
- Four years comparative audited results
- Industry comparative data
- Full details of debt facilities
- Gardaworld Kenya Limited Medium Term Note Programme Memorandum and Pricing Supplements
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.
GCR affirms Kenya Kazi Limited’s rating of BBB(KE), Stable Outlook