Announcements Corporate Rating Alerts

GCR affirms the National Scale Issuer Rating on Kenya Kazi Limited at BBB(KE)/ A3(KE); Outlook Negative.

Rating Action

Johannesburg, 20 December 2019 – GCR Ratings (“GCR”) has affirmed the national scale long term and short term Issuer ratings on Kenya Kazi Limited at BBB(KE) and A3(KE) respectively; with the ratings placed on Negative Outlook. Concurrently, GCR has assigned Gardaworld Kenya initial national scale long term and short term Issuer Ratings of BBB(KE) and A3(KE) respectively; with a Negative Outlook accorded. At the same time, GCR has affirmed Gardaworld Kenya’s medium-term note (“MTN”) programme’s national scale long term senior unsecured debt rating at BBB(KE), with a Negative outlook.

Rated Entity / Issue Rating class Rating scale Rating Outlook / Watch
Kenya Kazi Limited Issuer Long Term National BBB(KE) Negative Outlook
Issuer Short Term National A3(KE)
Gardaworld Kenya Issuer Long Term National BBB(KE) Negative Outlook
Issuer Short Term National A3(KE)
Gardaworld Kenya MTN Programme Issue Long Term, Senior Unsecured National BBB(KE) Negative Outlook

On May 22, 2019, GCR announced that it had released a new rating framework and sectoral criteria. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the Kenya Kazi Limited (“KK Limited”) and Gardaworld Kenya (GWK) MTN Programme ratings review under the new Criteria for Rating Corporate Entities. As a result, the ratings have been removed from ‘Under Criteria Observation’ and the ratings reviewed in line with the new methodology.

Rating Rationale

The ratings on KK and GWK (including its debt programme) reflect a group analysis, consolidating the two entities.GWK is a non-operating holding company with its sole investment being KK, the operating entity in the group.

The group’s creditworthiness reflects the group’s strong competitive position in the integrated security solutions market underpinned by good end-market geographic diversification, and moderate levels of gearing. The negative outlook reflects the group’s weakening in earnings performance, which could put pressure on credit protection metrics.

Although revenues have increased marginally over the past two years, an increase in staff costs, coupled with costs associated with re-branding some operations into the Gardaworld Security Corporation group (Gardaworld), saw earnings decline significantly in FY19. In this regard, the EBITDA margin declined to 5% in FY19 from 7% in FY18. This saw credit protection metrics weakening somewhat, with the EBITDA coverage of net interest declining to 2x and the net debt to EBITDA increasing above 2x at FY19 (FY18: 1.8x). Similarly, free cash flows from operations have remained depressed, with the operating cash flow coverage of debt around 30% in FY19. GCR expects the earnings to rebound in FY20 on the back of ongoing operating cost-containment measures, coupled with the effect of non-recurring expenses incurred in FY19. Thus, the EBITDA margin is expected to revert to the 6.5% to 7.5% range from FY19, with the net debt to EBITDA registering below 2x. That said, note is taken that intense pricing competitiveness in the Kenyan security industry may curtail margin progression.

While the short debt maturity profile is noted, the group’s liquidity position is considered to be sound. In this regard, GCR expects that sources of liquidity will cover its uses by at least 1x over the next 12 months. Although KK does not maintain large unutilised facilities to meet debt redemptions, GCR is of the view that long established funding relationships with a number of highly rated domestic financial institutions somewhat mitigates the refinancing risk inherent in the shortened debt maturity profile.

The ratings take cognisance of KK’s entrenched position as a leading integrated security solutions provider in East Africa, servicing a quality client base dominated by embassies, multinational corporates and other regional private institutions. KK also evidences adequate end-market diversity, with no single customer accounting for over 10% of revenues, as well as high contract renewal rates. The competitive position assessment is also enhanced by the operational and technical support from parent company Gardaworld. Gardaworld is one of the largest integrated security solutions companies in the world, which allows KK to leverage off existing global relationships. While management and governance are considered neutral to the ratings, GCR would expect to see an improvement the level of transparency and timeliness of financial disclosure.

Outlook Statement

The negative outlook reflects GCR’s concerns regarding the weakening in earnings performance, which could put pressure on credit protection metrics.

Rating Triggers

GCR could lower the ratings if KK’s EBITDA margins do not improve towards the 7% level, which will put pressure on the debt to EBITDA and interest coverage ratios. Rising refinancing risks, such as those coming in 2022, or a reduction in the weighted average maturity of the funding profile could also bring down the ratings. As could a failure to improve the frequency and quality of regulatory reporting. Conversely, positive ratings action could result from sustained improvement in earnings and free cash flow generation, coupled with a significant terming out of the debt maturity profile.

Analytical Contacts

Primary analyst Tavonga Muchemedzi Analyst: Corporate Ratings
Johannesburg, ZA tavongam@GCRratings.com +27 11 784 1771
Secondary analyst Eyal Shevel Sector Head: Corporate Ratings
Johannesburg, ZA shevel@GCRratings.com +27 11 784 1771
Committee chair Matthew Pirnie Sector Head: Financial Institutions
Johannesburg, ZA MatthewP@GCRratings.com +27 11 784 1771

Related Criteria and Research

Criteria for the GCR Ratings Framework, May 2019
Criteria for Rating Corporate Companies, May 2019
GCR Ratings Scale, Symbols & Definitions, May 2019
GCR Country Risk Score report, published June 2019
GCR’s Kenya Corporate Sector Risk Score reports/Market Alerts, published September 2019

Ratings history

KK Security

Rating class Review Rating scale Rating Outlook/Watch Date
Issuer Long Term Initial National BBB(KE) Positive September 2016
Issuer Short Term National A3(KE))
Issuer Long Term Last National BBB(KE) Stable November 2018
Issuer Short Term National A3(KE)

Gardaworld Kenya

Rating class Review Rating scale Rating Outlook/Watch Date
Issuer Long Term Initial/Last National BBB(KE) Negative Outlook December 2019
Issuer Short Term Initial/Last National A3(KE)) Negative Outlook December 2019

Gardaworld Kenya Medium Term Note Programme

Rating class Review Rating scale Rating Outlook/Watch Date
Issue Long Term, Senior Unsecured Initial National BBB(KE) Stable November 2016
Issue Long Term, Senior Unsecured Last National BBB(KE) Stable November 2018

Risk Score Summary

Risk score 7.50
Operating environment 7.50
Country risk score 4.50
Sector risk score 3.50
Business profile 1.50
Competitive Position 1.50
Management and governance 0.00
Financial profile -1.50
Earnings performance -0.50
Leverage and Capital Structure -0.50
Liquidity -0.50
Comparative profile 0.00
Group Support 0.00
Peer analysis 0.00

Glossary

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.
Country Risk The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.
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.
Debt Service Ratio A measure of a company’s ability to service its interest and principal redemption costs, expressed as the ratio of earnings or cash flows over a period to the sum of interest and principal payments over the same timeframe.
Diversification Spreading risk by constructing a portfolio that contains different exposures 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 rating has been lowered on its specific scale.
Facility The grant of availability of money at some future date in return for a fee.
Gearing Gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds, EBITDA or operating income.
Hedge A form of risk management aimed at mitigating financial loss or other adverse circumstances. May include taking an offsetting position in addition to an existing position. The correlation between the existing and offsetting position is negative.
Interest Cover Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given 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.
Issuer Ratings See GCR Rating Scales, Symbols and Definitions.
Issuer The party indebted or the person making repayments for its borrowings.
Leverage With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.
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.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Rating Horizon The rating outlook period.
Rating Outlook See GCR Rating Scales, Symbols and Definitions.
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.
Upgrade The rating has been raised on its specific scale.

Salient Points of Accorded Ratings

GCR affirms that a.) no part of the ratings process was influenced by any other business activities of the credit rating agency; b.) the ratings 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 credit ratings have been disclosed to Kenya Kazi Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.

Kenya Kazi 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 information received from Kenya Kazi Limited and other reliable third parties to accord the credit ratings included:

  • the 2018 audited annual financial statements (plus four years of audited comparative numbers);
  • unaudited accounts for FY19 for Kenya Kazi Limited
  • Unaudited accounts for FY18 and FY19 for Gardaworld Kenya Limited; and
  • Cash flow projections for FY20 and FY21
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