Johannesburg, 30 July 2018 – Global Credit Ratings has today affirmed the Industrial Development Corporation of South Africa Limited’s national scale Issuer ratings at AA+(ZA), and A1+(ZA) in the long term and short term respectively. The ratings have been accorded a Stable outlook.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Industrial Development Corporation of South Africa Limited (“IDC”) based on the following key criteria:
The rating on the IDC reflects its successful implementation of its core mandate within South Africa, very strong capital base, and good access to liquidity. This is balanced by the large concentration to specific counters and the broader mining and manufacturing sector, as well as moderate internal capital generation.
The IDC has a long, successful track record of developing industrial companies and supporting them through their lifecycle, in line with its investment mandate. This mandate allows it to assume higher risk and invest in a countercyclical manner, whilst robust credit approval procedures and post investment support has further helped develop its investee companies.
Balancing the sometimes competing demands of the political and the private sector stakeholder, remains an ongoing focus. Although the IDC is a State Owned Enterprise, it is overseen by a fully independent Board of Directors, and has substantial operational independence, particularly with respect to approving specific investments. However, GCR does consider the potential for political interference to be increasing, amidst the current weak economic environment and constrained national fiscus.
Although the value of the investment portfolio spiked to R136bn at FY18 (FY17: R127bn) driven by firmer equity prices, GCR is mindful that this has been driven by market movements which are inherently volatile, exacerbated by the high concentration to the commodity sector. Nevertheless, the dividend inflows and substantial potential liquidity provided by the large equity portfolio is a key factor supporting the current strong rating. The IDC’s core target segments (mining and industrial) are those that have been most affected by the economic slowdown, resulting in the rising impairments evidenced in FY18. While efforts to take a more active role in supporting investee companies are positively considered, GCR expects the level of impairments to remain high over the medium term, which could see the overall impairment ratio move towards the Corporation’s tolerance level.
The robust increase in FY18 income was supported by some large once off items, with sustainable income expected to remain around R7.5bn. As expenditure has been well contained, this should translate into strong operating profit for the IDC. However, the elevated impairment costs expected over the medium term may result in sustained operating losses (as in FY18).
Gross debt at the company level has almost doubled since FY13, to R33.5bn at FY18, resulting in a steady rise in gearing metrics over the review period. Although gross gearing of 38% remains well below the IDC’s tolerance level of 60%, GCR will continue to monitor debt utilisation as continued increases may lead to more concerning levels, particularly if cash flows remain under pressure. The IDC’s key credit strength is its very strong access to funding. It maintains funding facilities, with a wide range of local and international banks, development institutions and investment funds. As at FY18, it had unutilised facilities of R5.7bn, with a further R25bn in potential funding being discussed to expand disbursements (although the funding limit is much lower). Moreover, the corporation has been able to refinance facilities well ahead of maturity and achieve much longer tenors.
Given the strong rating there is limited scope for upward movement. This would only be likely if there were several other substantial investments whose credit ratings matched or exceeded the country limit. Conversely, negative rating action may arise if the weak operating persists, resulting in sustained increases in impairments . A substantial increase in debt, even to drive growth in disbursements could result in some gearing pressure, especially if investment performance remains under pressure.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (July 2017)|
|Long term: AA+(ZA)|
|Short term: A1+(ZA)|
|Rating outlook: Stable|
|Sector Head: Corporate and Public Sector Ratings|
|Senior Analyst: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Global Master Criteria for Rating Public Entities, updated February 2018
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S Corporates GLOSSARY
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Commodity||Raw materials used in manufacturing industries or in the production of foodstuffs. These include metals, oil, grains and cereals, soft commodities such as sugar, cocoa, coffee and tea, as well as vegetable oils.|
|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.|
|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.|
|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 corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Downstream||Downstream refers to the processing of raw materials into a product required by end users and consumers.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|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.|
|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 Rating||A 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.|
|Mandate||Authorisation or instruction to proceed with an undertaking or to take a course of action. A borrower, for example, might instruct the lead manager of a bond issue to proceed on the terms agreed.|
|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.|
|Refinancing||The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
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 were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
The Industrial Development Corporation of South Africa 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 the Industrial Development Corporation of South Africa with no contestation of the ratings.
The information received from the Industrial Development Corporation of South Africa and other reliable third parties to accord the credit ratings included:
- Audited financial statements for FY18, and four years comparative audited financial statements
- FY18 results presentation, including all financial details of the mini-Group
- Corporate plan 2018/19-2022/23
- Asset-Liability Committee information pack June 2018
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.