Johannesburg, 16 February 2021 – GCR Ratings (‘GCR’) has affirmed Transaction Capital Risk Services Proprietary Limited’s national scale primary and special servicer ratings of SQ1-(ZA)/SQ1(ZA) respectively, with outlooks accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Transaction Capital Risk Services Proprietary Limited||Primary Servicer||National||SQ1-(ZA)||Stable Outlook|
|Special Servicer||National||SQ1(ZA)||Stable Outlook|
The national scale servicer quality ratings on Transaction Capital Risk Services Proprietary Limited (‘TCRS’, ‘the entity’) balance a strong debt collection profile for both its principal and agency portfolios, stable technology and internal control environment, good management team and a fairly strong financial profile.
Collections have been steady over the past 3-5 years registering 1.5% growth in 2020. This positive trend benefits from TCRS’ adequately diversified portfolio (by sector/asset class) that has helped weather a difficult environment. In addition, resilience in collections can also be attributed to the entity’s change to its collections strategy over the last few years. The principal portfolio (acquired book debts) is now the predominant revenue contributor, representing a significant shift from agency business. Having said that, the acquired debt portfolio has strong collection fundamentals, with a 5-year average estimated remaining collections of 2.9x, although expectations are that the multiple will decline to around 2.6x given debt serviceability challenges under the COVID-19 environment. While it is positive to note the sustained growth in collections, the rate has been reducing over the last 2 years largely owing to the public sector portfolio whose collections dropped by close to R500mln from cessation of mandates. Notwithstanding this, collections over the last 3 months from date of assessment have returned to 100% pre-COVID levels.
TCRS’ fintech platform “Cheetah” is a key competitive advantage strengthening the collections experience. Ongoing IT investments including regular maintenance of the system is also viewed positively. The internal control environment is considered to be good.
We consider the stable and experienced management team of TCRS to be broadly supportive of its collection ability. The Issuer buys and collects multiple debt asset classes within various sectors, while the breadth of management experience and staff support is considered adequate. In addition, management’s forward flow agreements with some top tier corporates adds stability to principal collections.
Financial profile is fairly strong balancing modest levels of leverage with net debt to EBITDA of approximately 2x and funds from operations accounting for just 48% of net debt. Free operating cash flow is negative due to the fairly rapid expansion of TCRS’ purchased book debts. Earnings are fairly strong, reflected by an EBIT margin over 30%. Risk position is also fairly strong, with average estimated remaining collections (‘ERC’) of 2.9x purchase price. However, earnings came under pressure in 2020 due to significant write downs of purchased book values due to the impact of COVID-19 on collections, forcing a revision of ERC to around 2.6x. We also factor in adequate levels of liquidity, with further support derived from the holding company. The financial profile also benefits from geographical diversification of business, with c.25% of revenues generated from Australia which is considered to have a stronger operating environment.
The outlook factors in stable technology and internal control environment, stable management team, strong collections ability and strong financial profile. Alongside the above, GCR recognises the collections environment is likely to get tough and this could, over time, negatively impact the ratings.
There is no upside to the special servicer quality rating as we have accorded the highest rating. An improvement on the primary servicer quality rating could result from an extended track record in debtor administration capabilities alongside sustained stronger collections. A weakening financial profile and/or systems and control environment of the entity, in addition to reducing collections, could lead to a downgrade in both ratings.
|Primary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||SimbarakeC@GCRratings.com||+27 11 784 1771|
|Committee chair||Vinay Nagar||Senior Financial Institutions Analyst|
|Johannesburg, ZA||Vinay@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Global Master Structured Finance Servicer Rating Criteria, February 2018|
|Criteria for Rating Financial Institutions, May 2019|
|Criteria for Rating Financial Services Companies, May 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, February 2021|
|GCR Financial Institutions Sector Risk Score, February 2021|
Transaction Capital Risk Services Proprietary Limited
|Rating class||Review||Rating scale||Rating||Outlook||Date|
|Primary Servicer||Initial||National||SQ2+(ZA)||Stable||June 2013|
|Special Servicer||Initial||National||SQ1-(ZA)||Stable||June 2013|
Rating Factor Score Summary
|Rating factor scores|
|Systems and controls||5.0|
|Management and staff||4.0|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|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.|
Salient Points of Accorded Ratings
GCR affirms that a.) no part of the ratings were 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.
The servicer quality ratings have been disclosed to TCRS. 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.
TCRS participated in the rating process via face-to-face management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from TCRS and other reliable third parties to accord the servicer quality rating included:
- Audited financial results of Transaction Capital Limited as at 30 September 2020;
- TCRS collections and AUM data as at 31 December 2020;
- Latest internal and/or external audit report to management;
- Industry comparative data.