Johannesburg, 30 November 2018 – Global Credit Ratings has affirmed National Housing Finance Corporation Soc Limited’s national scale ratings of A+(ZA) and A1(ZA) in the long-term and short-term respectively; with the ratings placed on Rating Watch. At the same time, Global Credit Ratings has affirmed National Housing Finance Corporation Soc Limited’s international scale long-term local currency rating of BB; with the ratings also placed on Rating Watch.
SUMMARY RATING RATIONALE
The placement of the ratings on ‘Rating Watch’ reflects the government inspired merger between the National Urban Reconstruction and Housing Agency (“NURCHA”) and the Rural Housing Loan Fund (“RHLF”) into the National Housing Finance Corporation (“NHFC”). The process of consolidation is currently underway; therefore the exact financial and organisational structure cannot yet be determined. However, GCR is of the opinion that the merger process will increase the capital base, product offering and reach into rural areas within South Africa. On the other hand, depending on the nature of the merger, asset quality may be weaker.
On a standalone basis the credit quality of the NHFC is under pressure. This reflects a material deterioration of asset quality, emanating from the rental collection pressure from defecting tenants on some of NHFC’s clients in the social housing sector, which has caused a covenant breach on one funding line. The worst implication of the breach could be accelerated repayments of the debt. However, the entity currently has sufficient liquidity to be able to meet the obligation in full and in time.
GCR expects to have a clearer view of the above by the end of first quarter 2019.
A downward ratings movement could occur if the entity is unable to resolve the covenant breach, or asset quality doesn’t improve, or if capital and earnings are materially affected by write-offs and impairments. Although considered unlikely, the ratings of the post-merger entity could improve if we see a significant improvement in asset quality, sustained profitability and stronger mandate, combined with a favorable operating environment.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATINGS HISTORY|
|Initial rating (February 2004)||Initial rating (November 2013)|
|Long term: AA-(ZA); Short term: A1+(ZA)||Long term: BBB|
|Outlook: Stable||Outlook: Stable|
|Last rating (November 2017)||Last rating (June 2018)|
|Long term: A+(ZA); Short term: A1(ZA)||Long term: BB|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Secondary Analyst|
|Vimbai Muhwati||Kudzanai Samanga|
|Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Global Criteria for Rating Finance and Leasing Companies, updated March 2017
NHFC rating reports (2004-17)
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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
National Housing Finance Company Soc Limited participated in the rating process via face to face meetings 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 National Housing Finance Company Soc Limited.
The information received from National Housing Finance Company Soc Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results of the NHFC, NURCHA and RHLF to 31 March 2018 (plus four years of comparative numbers of NHFC);
- Interim financial results of NHFC and to 30 September 2018;
- Latest internal and/or external audit reports to management;
- Corporate governance and enterprise risk framework.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Corporate Governance||Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|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.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|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.|
|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.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long-Term||Not current; ordinarily more than one year.|
|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.|
|National Scale Rating||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.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Watch||Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Securities||Various instruments used in the capital market to raise funds.|
|Security||An asset deposited or pledged as a guarantee of the fulfilment of an undertaking or the repayment of a loan, to be forfeited in case of default.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
For a detailed glossary of terms please click here
GCR affirms National Housing Finance Corporation Soc Limited’s rating at A+(ZA); Rating Watch.