Announcements

GCR affirms Nampak Products Limited’s rating of A(ZA), Negative outlook

Johannesburg, 26 May 2017 — Global Credit Ratings has today affirmed the national scale Issuer ratings assigned to Nampak Products Limited of A(ZA) and A1(ZA) for the long and short term respectively; with the outlook accorded as Negative.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Nampak Products Limited (“Nampak Products,” “the subsidiary” or “the company”) based on the rationale summarised below. As part of its analysis, GCR makes a number of adjustments to the audited financials, which include stripping goodwill and other intangibles from the balance sheet, as well as excluding material non-recurring and non-cash items from the EBITDA calculation. Results are also not adjusted for discontinued operations in retrospect beyond the YoY changes disclosed in the audited financial results.

The ratings are premised on the explicit, unconditional and irrevocable guarantee provided by parent Nampak Limited (“Nampak” or “the group”) in respect of the subsidiary’s R2bn DMTN Programme and in favour of financial institutions, as well as certain counterparties. The guarantees are meant to place creditors in the same position as they would have been had the group been the Issuer/debtor, and thus rank pari passu with other Nampak obligations. In April 2017, GCR affirmed Nampak’s long and short term Issuer ratings of A(ZA) and A1(ZA) respectively, with a Negative outlook accorded.

Nampak Products is a wholly-owned Nampak subsidiary, which in turn owns packaging businesses in South Africa and Angola. In determining the ratings, GCR has considered the myriad inextricable linkages that emphasise the subsidiary’s strategic importance to Nampak and further entrench the rating alignment.

The regional footprint is a key earnings underpin and is essential to the group’s overarching strategy, but also exposes Nampak Products to territories that present higher operating risks than South Africa. This continues to manifest in foreign exchange losses, mainly related to the devaluation of the Kwanza and challenges in converting cash generated in Angola to settle USD-denominated commitments. The large cash balances in Angola as a result and amplification of USD-denominated debt balances (equating to R1bn and R3bn respectively at FY16) upon translation also amplify currency risk. Hedges have been employed to mitigate this risk, which coupled with continued improvement in the currency extraction rate, could reduce restricted cash in the medium term. That said, the material capital exposure to Angola, and that of the group to Nigeria, currently restrict the ratings. As cash is largely restricted, GCR has focused on the gross metrics in its analysis of gearing and liquidity.

Continuing operations have reflected resilience despite constrained demand in key territories, achieving 6% revenue growth in FY16. Enhanced productivity on the back of modern capacity and improved operational oversight widened the gross margin, and while the cost benefit of these efficiencies was largely passed onto customers, the EBIT margin remained sound, at 9.2% (FY15: 9.4%). Renewable contracts with large multinationals will continue to anchor strong baseline demand, albeit domestic volume progression is expected to be restrained over the rating horizon, in view of weak macroeconomic fundamentals. Having been previously constrained by the impairment of tinplate lines and losses from non-core entities that have since been sold, attributable earnings were bolstered by R1.3bn in net profit from a R1.7bn property sale and leaseback transaction in FY16. Sound cash generation together with the impact of enhanced inventory and logistics controls in the region, also boosted operating cash flow.

With 75% of the proceeds of the sale and leaseback transaction used to settle local interest bearing debt, borrowings eased to R5.9bn at FY16 (FYE15: R6.5bn), R1bn being intragroup loans. Treating the latter as working capital, gross debt equated to 131% and 281% of equity and EBITDA respectively (FY15: 182%; 357%). The metrics remain aligned to the ratings when operating leases have been considered. Per management, further debt reprofiling has materially reduced the interest cost burden, pushed out some maturities and improved debt service metrics, albeit the latter remain well below historical highs. Liquidity is also supported by ample untapped facilities from strongly rated financiers. With Nampak Products’ major capex projects completed, debt is not expected to rise materially in the medium term.

As Nampak Products’ Issuer ratings are underpinned by Nampak guarantees, a migration of the parent’s Issuer ratings would likely trigger an upgrade or downgrade. Furthermore, significant deterioration in the subsidiary’s operational performance and/or business fundamentals, or a material weakening of linkages with its parent would warrant negative rating action.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (July 2004)    
Long term: n.a; Short term: A1(ZA)    
Outlook: Stable    
     
Last rating (May 2016)    
Long term: A(ZA); Short term: A1(ZA)    
Outlook: Negative    
     

ANALYTICAL CONTACTS

Primary Analyst    
Patricia Zvarayi    
Senior Analyst    
(011) 784-1771    
patricia@globalratings.net    
     
Committee Chairperson    
Sheri Few    
Senior Analyst: Corporate & Public Sector Debt Ratings    
(011) 784-1771    
few@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global master criteria for rating corporate entities, updated February 2017

Nampak Limited rating reports (2001-17)

Nampak Products Limited rating reports (2004-16)

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.

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

Currency Risk The potential for losses arising from adverse movements in exchange rates.
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.
Exposure Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.
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.
Hedge A form of insurance against financial loss or other adverse circumstances.
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.
Liquidity The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price. 
Long-Term Rating A long-term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
Multinational A company that operates commercially in a number of countries outside of the one wherein it is based. Such companies are often listed on more than one stock exchange or have shares available via depository receipts.
Operating Cash Flow A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.
Operating Profit Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.
Risk The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.
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.
Long Term Rating A long-term rating reflects an issuer’s ability to meet its financial obligations over the following three to five-year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.


SALIENT POINTS 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; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Nampak Products 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 ratings have been disclosed to Nampak Products Limited with no contestation of the ratings.

The information received from Nampak Products Limited and other reliable third parties to accord the credit rating(s) included;

  • the 2016 audited annual financial statements (plus four years of comparative numbers);
  • financial and other information related to Nampak Limited (as per the credit rating report released in April 2017); and
  • a breakdown of facilities available (including related counterparties).

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 Nampak Products Limited’s rating of A(ZA), Negative outlook

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