Announcements

GCR affirms Quince Capital (Proprietary) Limited’s national scale credit rating at A(ZA); Stable O

Johannesburg, 31 August 2018 – Global Credit Ratings has affirmed the national scale ratings of A(ZA) and A1(ZA) accorded to Quince Capital (Proprietary) Limited in the long term and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed the international scale local currency (“LC”) rating of Quince Capital (Proprietary) Limited at BB-; with the outlook accorded as Stable.

RATING RATIONALE

The ratings on Quince Capital (Proprietary) Limited (“Quince Capital”, “the company”) reflect the company’s position within the Reunert Group. This view is supported by its 100% ownership and 97.1% funding contribution by the parent, alongside its key strategic position providing financing to the Nashua franchises and their customer base. We have also taken into consideration Quince Capital’s strong asset quality and stable financial profile, notwithstanding tough economic and credit conditions, alongside robust capitalisation and returns.

South African based-Quince Capital (Proprietary) Limited is a wholly-owned subsidiary of Johannesburg Stock Exchange listed Reunert Limited (“Reunert”, “the group”) via Reunert ICT Holdings (Pty) Limited (“parent”). The company is completely reliant on the group for its customer acquisition, strategy, capital and funding (97%). As a result, we do not believe that Quince could currently operate from outside the confines of the group. Our credit view on the group balances a strong financial profile, including low leverage, very high debt serviceability and good cash flows versus limited geographic and business diversification in a competitive industry and slow economy.

In comparison to other South African based financial service providers, Quince is small and operates in a niche with a limited product offering, predominantly providing asset backed financing to franchises of the Nashua group and its customer base. Nevertheless, it is an important part of the wider groups strategy and sales. During FY17, Quince provided c.90% financing for customer sales of the Nashua core product suite. We believe that reliable and consistent access to credit for Nashua’s customer base, is an important factor for Nashua and her franchises. Positively, the revenue and business stability has been good for Quince, in part due to this niche position, with repeat business accounting for approximately 67%. Conversely, due to the company’s reliance on the Nashua business, there is significant business stability risk should the Nashua business and/or its relevance in the market deteriorate.

The company’s capital is considered sound relative to its (full or partial recourse) asset-backed financing offering, with a capital adequacy ratio of 17.9% at FY17. We believe this is adequate to absorb deal termination and/or credit losses under normal and significant stress scenarios. Quince Capital’s internal generation has been consistently strong above 20% over the past years and ROA and ROE registered 4.3% and 24.2% at FY17 respectively.

The main source of credit risk is from lending activities, 98.5% of total assets. Positively, asset quality is good. The company has a stringent credit vetting process and given Quince Capital’s controlled, conservative approach to risk taking, the current levels are expected to continue in the long-term. Management targets a 12-month average claims ratio below 150bps on 50% recourse loans, and actual credit losses have been well below 100bps over an extended period.

Funding is predominantly sourced from excess cash within the Reunert group (97.1%), routinely made available on commercial terms, and with no fixed date of repayment. At 30 June 2018, the company had R950m approved unused overnight facilities with three local commercial banks payable on demand. Due to the uncommitted nature of the facilities they are not considered to be stable funds. Reduced funding from the group or funding diversification outside the group by the company, will result in ratings migration from Reunert negatively affecting the company’s rating.

The ratings are limited by that of the parent, due to the company’s position as a captive finance provider. Consequently, any ratings improvement would require a corresponding improvement in the group’s creditworthiness. However, the ratings downside is two-fold. Firstly, if the group (or Nashua’s) creditworthiness deteriorated so would that of Quince. Secondly, if we viewed the group importance of Quince to be reducing, either through lower ownership or funding support or reduced impact within the Nashua sales, we could also bring down the ratings.

NATIONAL SCALE RATINGS HISTORY   INTERNATIONAL SCALE RATINGS HISTORY
     
Initial rating (August 2013)   Initial rating (August 2013)
Long-term: A+(ZA), Short-term: A1(ZA)   International (LC): BBB-
Rating outlook: Stable   Rating outlook: Stable
     
Last rating (August 2017)   Last rating (June 2018)
Long-term: A(ZA), Short-term: A1(ZA)   International (LC): BB-
Rating outlook: Stable   Rating outlook: Stable

ANALYTICAL CONTACTS

Primary Analyst   Committee Chairperson
Vimbai Muhwati   Matthew Pirnie
Credit Analyst   Sector Head: Financial Institution Ratings
(011) 784-1771   (011) 784-1771
vimbaim@globalratings.net   matthewp@globalratings.net

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

Quince Capital rating reports (2013-17)

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/RATING-SCALES-DEFINITIONS. 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.

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 ratings have been disclosed to Quince Capital (Proprietary) Limited.

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

  • Audited financial results of the company to 30 September 2017 (plus four years of comparative numbers);
  • Audited financial results of the group to 30 September 2017 (plus four years of comparative numbers);
  • Interim financial results of the group to 31 March 2018;
  • 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.

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).
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.
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.
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.
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.
Downgrade The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.
Financial Institution An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.
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.
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 Outlook Indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).
Recourse The right to demand payment/collect from the maker or endorser of a negotiable instrument.
Risk The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.
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.
Stock Exchange A market with a trading-floor or a screen-based system where members buy and sell securities.

For a detailed glossary of terms please click here

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