Johannesburg, 27 July 2016 — Global Credit Ratings has affirmed the national scale ratings assigned to Real People Investment Holdings Limited of BB+(ZA) and B(ZA) in the long term and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has affirmed and withdrawn the unsolicited international scale local currency rating assigned to Real People Investment Holdings Limited of B+; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Real People Investment Holdings Limited (“Real People”, “the group”) based on the following key criteria:
The ratings/outlook of Real People reflect stabilisation in profitability and asset quality, albeit still fragile, in addition to weak economic conditions and an uncertain regulatory environment which continues to pose credit, earnings and funding risks to the group.
In recent years, the sale and/or discontinuation of underperforming businesses (general purpose lending, cellular, Empower Financial Services (“EFS”) and Aspire Group), and disappointing collections on continuing self-originated and bought-in servicing portfolios, have eroded the group’s capital base and income generating capacity. In large part, these issues were linked to suboptimal pre-F14 underwriting, compounded by collections challenges including rising levels of consumer indebtedness and stress, myriad regulatory changes, and supplier price adjustments, which together increased the effort and cost of collection. The effect of these challenges has been amplified by Real People’s significant exposure (as principal and servicer) to unsecured loans, as well as its relatively undiversified business model.
Substantial losses, driven by margin compression and higher impairments, necessitated a R385m capital raise in F15. In F16, the positive financial impact of a number of long term strategic initiatives has helped to stabilise the group’s financial position.
The group returned to profitability in F16, posting an after-tax profit of R7.7m (following losses in F14 and F15), assisted by non-recurring items including debt buyback programme revenues and the release of foreign currency translation reserves to income. However, the group’s ROaE (1.9%) and ROaA (0.3%) were low, providing a weak buffer to absorb credit losses.
The group’s capital adequacy ratio of 34.5% at FYE16 (FYE15: 34.4%) remained above the covenant level of 30%, but marginally below management’s target level of 36%.
Based on recent non-performing loan (“NPL”) vintages, asset quality seems to be recovering. The group’s gross NPL ratio improved to 34.2% at FYE16 (FYE15: 53.5%), mainly due to significant write-offs, and is partly amplified by declining loan balances. As a consequence of the weak economic conditions (characterised by high levels of consumer indebtedness, poor employment prospects, higher living costs and rising interest rates), the group’s asset quality remains vulnerable.
In F16 the group raised c.R803m in debt funding, through a listed bond issuance in Kenya (in line with its strategy to migrate funding from group to divisional level) and secured funding in South Africa, which contributed to improving the liquidity position of the group and its efforts to promote asset origination, including the acquisition of distressed debt portfolios.
Given the challenging operating environment, and Real People’s constrained financial flexibility, there is currently limited upside rating potential. Real People’s ratings will be sensitive to deterioration in asset quality and long-term earnings (leading to a weakened buffer to counter inherent risks in its business model). Furthermore, negative rating action may follow unfavourable economic/regulatory developments that materially impact the group’s profitability and long term sustainability.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (Nov/2011)|
|Long-term: BBB(ZA); Short-term: A2(ZA)|
|Last rating (Dec/2015)|
|Long-term: BB+(ZA); Short term: B(ZA)|
|Sector Head: Financial Institution Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
Real People rating reports (2011-15)
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.
The ratings above were solicited by, or on behalf of, Real People Investment Holdings Limited, and therefore, GCR has been compensated for the provision of the ratings.
Real People Investment Holdings 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 Real People Investment Holdings Limited with no contestation of the rating.
The information received from Real People Investment Holdings Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results of the group as at 31 March 2016 (plus four years of comparative numbers);
- Budgeted financial statements for 2017;
- Board and ALCO minutes for the last financial year;
- Other performance data and commentary; and
- Industry data.
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.|
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|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.|
|Capital Adequacy||A measure of the adequacy of an entity’s capital resources in relation to its current liabilities and also in relation to the risks associated with its assets. An appropriate level of capital adequacy ensures that the entity has sufficient capital to support its activities and that its net worth is sufficient to absorb adverse changes in the value of its assets without becoming insolvent.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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.|
|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.|
|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.|
|Financial Year||The year used for accounting purposes by a company. It can be a calendar year or it can cover a different period, often starting in April, July or October. It can also be referred to as the fiscal year.|
|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.|
|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.|
|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.|
|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.|
|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||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.|
|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.|
|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 utilised in this announcement please click here
GCR affirms Real People Investment Holdings Limited’s rating of BB+(ZA); Outlook Stable.