Announcements

GCR affirms Nampak Products Limited’s rating of A(ZA); Outlook Negative

Johannesburg, 16 May 2016 — Global Credit Ratings has today affirmed the national scale ratings assigned to Nampak Products Limited of A(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Negative.

SUMMARY RATING RATIONALE

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

Nampak Products’ ratings are premised on the explicit, unconditional and irrevocable guarantee provided by its parent Nampak Limited (“Nampak”), in respect of the subsidiary’s R2bn Note Programme, as well as explicit, unconditional and irrevocable guarantees amounting to R7.2bn in favour of its banking counterparties. The guarantees are meant to place DMTN noteholders (and other creditors, as stipulated by the various guarantees) in the same position as they would have been if Nampak were the Issuer or debtor, and therefore rank pari passu with other Nampak obligations. In March 2016, GCR affirmed Nampak’s national scale, long and short term Issuer ratings of A(ZA) and A1(ZA) respectively with a Negative outlook accorded.

Nampak Products is wholly-owned by Nampak, and is comprised of several packaging businesses operating both locally and in the region. A number of linkages underpin its strategic importance to Nampak and further support the rating alignment. While the regional footprint provides important earnings underpin, GCR notes the higher risk inherent in operating outside of South Africa, which is exacerbated by the devaluation of currencies in countries where Nampak operates. This is borne out in the sharp reversal in foreign exchange movements in F15, and the amplification of USD intracompany loans on translation.

While the disposal of marginal businesses accounted for the 23% contraction in F14, the remaining businesses supported revenue growth of 8% to R12bn in F15. This was largely owing to the stronger rest of Africa performance during the year. However, the weaker SA performance resulted in material margin compression, reducing operating profit to a review period low of R1.2bn (F14: R1.6bn). The bottom line was further constrained by the impairment of tinplate lines, losses from discontinued operations, foreign exchange movements which saw net profit decline by 39% to R450m in F15.

Cash generated by operations declined by 41% to R1.2bn in F15, and after accounting for working capital pressure and a sizeable interest outlay, group operating cash flows were down 66% to R651m. Debt rose to R6.5bn at FYE15 (FYE14: R5.8bn), partly due to a distortion in the value of foreign currency loans from the holding company on translation. Accordingly, net gearing and net debt to EBITDA increased to 188% and 348% respectively (FYE14: 131% and 274%). Excluding the intracompany loans, net gearing would have registered at 105% and net debt to EBITDA at 195% (FYE14: 61% and 128%).

As Nampak Products’ national scale Issuer ratings are underpinned by Nampak guarantees, a migration of the parent’s Issuer ratings would likely trigger an upgrade or downgrade. In addition, significant deterioration in the subsidiary’s operational performance and/or business fundamentals, or a material revision/weakening of the aforementioned linkages with its parent could place downward pressure on the ratings.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (July 2004)    
Long term: n.a; Short term: A1(ZA)    
Outlook: Stable    
     
Last rating (April 2015)    
Long term: A(ZA); Short term: A1(ZA)    
Outlook: Stable    

ANALYTICAL CONTACTS

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

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, February 2016.

Nampak Limited Rating Reports (2001 – 2016).

Nampak Products Limited Rating Reports (2004-2015).

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

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
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.
Impairment Reduction in the value of an asset because the asset is no longer expected to generate the same benefits, as determined by the company through periodic assessments.
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.
Net Profit Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.
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 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.
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.
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.

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.

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 rating/s has been disclosed to Nampak Products Limited with no contestation of the rating.

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

  • Audited financial results of Nampak Limited per 30 September 2015;
  • Audited financial results of Nampak Products Limited per 30 September 2015;
  • Four years audited financial results for 2010-2014;
  • Management presentations;
  • A breakdown of facilities available and related counterparties; and
  • Corporate governance and enterprise risk framework.

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.

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GCR affirms Nampak Products Limited’s rating of A(ZA); Outlook Negative

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