Announcements

GCR affirms National Housing Finance Corporation Soc Limited’s rating of AA-(ZA); Outlook Negative

Johannesburg, 18 November 2015 — Global Credit Ratings has affirmed the national scale ratings assigned to National Housing Finance Corporation Soc Limited of AA-(ZA) and A1+(ZA) in the long term and short term respectively; with the outlook accorded as Negative. Furthermore, Global Credit Ratings has affirmed the international scale rating assigned to National Housing Finance Corporation Soc Limited of BBB; with the outlook accorded as Negative.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to National Housing Finance Corporation Soc Limited (“NHFC”, “the Corporation”) based on the following key criteria:

The ratings draw significant uplift from the Corporation’s position as a state-owned development finance institution (“DFI”), providing affordable housing finance opportunities to the gap market (households who earn between R3,500 and R15,000 per month).

Despite achieving the bulk of its developmental objectives in F15, key performance measures (being loan book growth, asset quality and profitability) came under pressure, in challenging market conditions. Furthermore, the NHFC breached certain financial covenants relating to its loan facility with Agence Française de Développement (“AFD”), which agreed to waive its rights and not to accelerate the repayment of the credit facility.

The NHFC implemented a strategic reorganisation program in F15, aimed at enhancing operational efficiencies, which resulted in the termination of 32 employees’ contracts (inclusive of resignations), reducing the staff complement to 53.

The NHFC secured grant capital of R230m in 3Q 2014, with a commitment by the shareholder for further recapitalisation, which is to be paid in three tranches of R100m in each of the following three years. The first tranche of R100m was received in August 2015. Furthermore, the recent Medium Term Expenditure Framework (“MTEF”) allocations included a further R105.8m in F19.

Solvency indicators remain strong. The total capital to assets ratio was 81.4% at FYE15, while gross gearing remained extremely low at 0.1x.

Asset quality remains a constraining factor for the ratings, with the level of impaired loans/arrears rising to 21.9%/24.0% of gross loans at FYE15 (FYE14: 14.3%/15.7%).

Operating income increased by 21.6% to R229.9m in F15. However, non-recurring costs associated with the internal restructure, and a 2.9x rise in impairment costs to R80.4m, resulted in an 87.1% decline in net profit before tax to R6.7m. The financial performance for F16 is forecasted to be adversely impacted by an increased level of impairments as well as reduced revenue resulting from rising non-performing loans.

The outlook for the short to medium term remains challenging, and indications are that particular financial covenants relating to NHFC’s borrowings will continue to be under threat – key drivers being the overall quality of the loan book, and profitability. The NHFC is, however, engaging with its funders, who have indicated their commitment as strategic partners of the Corporation.

The ‘Negative’ rating outlooks combined with the Corporation’s challenging operating environment limits the likelihood of upgrades over the medium term. The NHFC’s ratings will be sensitive to a lack of improvement in asset quality and earnings, the potential inability to gain access to sufficient funding and/or continued covenant breaches.

NATIONAL SCALE RATINGS HISTORY   INTERNATIONAL SCALE RATING 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 2014)   Last rating (November 2014)
Long term: AA-(ZA); Short term: A1+(ZA)   Long term: BBB
Outlook: Stable   Outlook: Negative
     

ANALYTICAL CONTACTS

Primary Analyst
Kurt Boere
Credit Analyst
(011) 784-1771
boere@globalratings.net
 
Committee Chairperson
Omega Collocott
Sector Head: Financial Institution Ratings
(011) 784-1771
omegac@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015

Global Criteria for Rating Finance and Leasing Companies, updated March 2015

NHFC rating reports (2004-14)

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.

National Housing Finance Corporation Soc 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 National Housing Finance Corporation Soc Limited with no contestation of the ratings.

The information received from National Housing Finance Corporation Soc Limited and other reliable third parties to accord the credit ratings included:

  • Audited financial results of the group and company to 31 March 2015 (plus four years of comparative numbers);
  • Interim financial results of the group and company to 30 September 2015;
  • Latest internal and/or external audit reports to management;
  • 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, National Housing Finance Corporation Soc Limited, and therefore, GCR has been compensated for the provision of the ratings.

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

Arrears An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.
Asset A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.
Asset Quality 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 (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.
Audit Report An audit report is a written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).
Balance Sheet Also known as a 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.
Capital The sum of money that is invested to generate proceeds.
Corporate Governance Corporate governance broadly 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 An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
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.
Creditworthiness An assessment of a debtor’s ability to meet debt obligations.
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.
Facility The grant of availability of money at some future date in return for a fee.
Financial Institution An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.
Financial Statements Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.
Forecast A calculation or estimate of future financial events.
Gearing With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt.
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.
Income Statement A summary of all the expenditure and income of a company over a set period.
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 Rate The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.
International Scale Rating ISRs relate to either foreign currency or local currency commitments, assessing the capacity of an issuer to meet these commitments using a globally applicable (and therefore internationally comparable) scale.
Lease Conveyance of land, buildings, equipment or other assets from one person (lessor) to another (lessee) for a specific period of time for monetary or other consideration, usually in the form of rent.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
Liabilities All financial claims, debts or potential losses incurred by an individual or an organisation.
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.
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.
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.
Non-Performing Loan When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.
Operating Profit Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.
Performing Loan A loan is said to be performing if the borrower is paying the interest on it on a timely basis.
Portfolio A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
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.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
Short Term Current; ordinarily less than one year.
Tranche Used to mean an allocation or instalment of a larger loan facility. Tranches of the same debt programme may differ from each other because they pay different interest rates, mature on different dates, carry different levels of risk, or differ in some other way.

For a detailed glossary of terms utilised in this announcement please click here

https://globalratings.net/uploads/files/2015-11-NHFC_(Rating_Announcement).pdf
GCR affirms National Housing Finance Corporation Soc Limited’s rating of AA-(ZA); Outlook Negative.

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