Announcements

GCR affirms Quince Capital (Proprietary) Limited’s rating of A+(ZA); Outlook Stable

Johannesburg, 20 August 2015 — Global Credit Ratings has affirmed the national scale ratings assigned to Quince Capital (Proprietary) Limited of A+(ZA) and A1(ZA) in the long term and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale rating assigned to Quince Capital (Proprietary) Limited of BBB-; with the outlook accorded as Stable.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to Quince Capital (Proprietary) Limited (“Quince Capital, “the company”) based on the following key criteria:

The ratings reflect Quince Capital’s strong credit quality, based on its established asset-based financial solutions offering, solid risk-focussed management, stable and sustainable financial profile, robust capitalisation and profitability, and support from its listed parent, Reunert Limited (“Reunert”, “the group”). The company is viewed as strategically important to the group (it diversifies revenue while facilitating sales of equipment through Nashua). The group supports the company by providing capital (via dividend policy/debt subordination), funding, a captive pipeline, and shared services. As such, the company’s ratings receive uplift for extraordinary parental support.

Average loans grew 18.4% between F13 and F14, driving growth in total operating income of 20.1%. Pre-tax profit growth of 26.9% to R111.4m (F13: R87.8m) was also impacted by stable operating expenses. Despite slower than anticipated loan growth, and competitive pressures impacting rental discounting margins, Quince Capital has continued its trend of generating capital internally at a rate of 22-24% per annum, supporting the capital/asset ratio at a solid level of 17.6%. In F14, increases to 3.7% ROaA (F13: 3.5%) and 25.8% ROaE (F13: 25.5%) were recorded.

Credit exposure is primarily to equipment rental end-users, or the franchise/dealer which originated the rental contract (through full or partial recourse arrangements). A combination of strong credit vetting/monitoring, a low-risk business model and high collateral resale values have resulted in historically modest/stable credit losses, in respect of which an adequate provision is maintained.

Quince Capital’s funding strategy aims to balance its captive nature and risk/flexibility advantages of more diversified funding. In F14, the company increased its bank facilities to R1.15bn (FYE13: R125m), its bank loan utilisation, and entered into interest rate swaps. The net effect of these actions was to hedge interest rate risk, without increasing funding costs. In 1H F15, Reunert’s levels of group excess cash increased, resulting in some short-term bank loans being repaid in favour of group funding.

The strong rating (including parental support) juxtaposed against the company’s modest size, limits the likelihood of the rating increasing over the medium term. However, enhanced market position, performance, and/or funding independence /diversification would enhance the standalone credit profile. The ratings may be downgraded following a material deterioration in trading performance, credit portfolio diversification and/or quality, liquidity risk, and diminished support from and/or credit profile of the group.

NATIONAL SCALE RATINGS HISTORY   INTERNATIONAL SCALE RATINGS HISTORY
     
Initial rating (August 2013)   Initial rating (August 2013)
Long-term: A+(ZA); Short-term: A1(ZA)   Long term: BBB-
Outlook: Stable   Outlook: Stable
     
Last rating (August 2014)   Last rating (August 2014)
Long term: A+(ZA); Short term: A1(ZA)   Long term: BBB-
Outlook: Stable   Outlook: Negative

ANALYTICAL CONTACTS

Primary Analyst    
Omega Collocott    
Sector Head: Financial Institution Ratings    
(011) 784-1771    
omegac@globalratings.net    
     
Committee Chairperson    
Jennifer Mwerenga    
Senior Credit Anlayst    
(011) 784-1771    
jennifer@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

Quince Capital rating reports (2013-14)

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.

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.
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).
Budget Financial plan that serves as an estimate of future cost, revenues or both.
Capital The sum of money that is invested to generate proceeds.
Cash Funds that can be readily spent or used to meet current obligations.
Collateral Asset provided to a creditor as security for a loan.
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.
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.
Default Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.
Diversification Spreading risk by constructing a portfolio that contains different investments, whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.
Dividend The portion of a company’s after-tax earnings that is distributed to shareholders.
Downgrade The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.
Exchange A standardised marketplace in which different assets are traded.
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.
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.
Franchise Business or banking franchise; a bank’s business.
Hedging A financial risk management process or function to take a market position to protect against an eventuality. Taking an offsetting position in addition to an existing position. The correlation between the existing and offsetting position is negative.
Income Statement A summary of all the expenditure and income of a company over a set period.
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.
Interest Rate Risk The potential for losses or reduced income arising from adverse movements in interest rates. Interest rate risk in the banking book is the risk that earnings or economic value will decline as a result of changes in interest rates. The sources of interest rate risk in the banking book are repricing/mismatch, basis and yield curve risk.
Interest Rate Swap An interest rate swap is an agreement in which two parties make interest payments to each other for a set period based upon a notional principal.
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.
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.
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.
Long term Not current; ordinarily more than one year.
Margin The rate taken by the lender over the cost of funds, which effectively represents the entity’s profit and remuneration for taking the risk of the loan; also known as spread.
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.
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.
Provision The amount set aside or deducted from operating income to cover expected or identified loan losses.
Risk Management Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.
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.
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.
Yield Percentage return on an investment or security, usually calculated at an annual rate.

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

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.

Quince Capital (Proprietary) 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 Quince Capital (Proprietary) Limited with no contestation of the rating.

The information received from Quince Capital (Proprietary) Limited and other reliable third parties to accord the credit rating(s) included:

  • Audited financial results of the company to 30 September 2014 (plus four years of comparative numbers);
  • Audited financial results of the group to 30 September 2014 (plus four years of comparative numbers);
  • Interim financial results of the group to 31 March 2015;
  • Budgets for Quince Capital (Proprietary) Limited for F15, and management accounts to 31 July 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, Quince Capital (Proprietary) Limited, and therefore, GCR has been compensated for the provision of the ratings.

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