Johannesburg, 14th August 2019 – GCR Ratings (‘GCR’) has affirmed Transaction Capital Limited’s long-term South African national scale rating at A-(ZA), while the short-term rating has been revised to A2(ZA) due to change in rating definitions. At the same time, Transaction Capital Limited’s long-term international scale rating has been revised to B+ from BB- due to a change in the mapping methodology (see the Criteria for the GCR Ratings Framework). The outlooks are Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Transaction Capital Limited||Issuer Long Term||National||A-(ZA)||Stable Outlook|
|Issuer Short Term||National||A2(ZA)||–|
|Issuer Long Term||International||B+||Stable Outlook|
GCR has reviewed the ratings on Transaction Capital Limited under the Criteria for Rating Financial Institutions and Criteria for Rating Financial Services Companies, May 2019. The ratings were placed “Under Criteria Observation” at the time of criteria publication. Subsequently, GCR has finalised the review under the two new methodologies, and the ratings have been removed from ‘Under Criteria Observation’.
The national scale ratings on Transaction Capital Limited (‘the group’) primarily reflect the strengths and weakness of its two major subsidiaries, SA Taxi Holdings (‘SA Taxi’) and Transaction Capital Risk Services (‘TCRS’).
Transaction Capital Limited is an unregulated non-operating holding company (‘NOHC’), actively investing in credit-oriented alternative assets. The NOHC has its two major subsidiaries both operating broadly within the financial services space. We consider both entities to be essential parts of the group, based on their earnings contribution.
SA Taxi is a vertically integrated asset backed lending company, providing developmental finance, insurance and other services to the minibus taxi industry in South Africa (‘SA’). TCRS is a technology led data-driven provider of customer management solutions through a scalable and bespoke fintech platform, with a geographical presence in SA, Australia, and it has recently penetrated the European market. The final rating on the group takes a blend of the strengths and weaknesses of SA Taxi and TCRS, in addition considering the diversification benefits from such different business lines. The fact that the holding company is net ungeared and is not exposed to any regulatory structural subordination also supports the rating of the NOHC.
We consider the competitive positioning of SA Taxi and TCRS to be a relative weakness to the rating, balancing their small and niche positions versus the large, diverse and prudentially regulated financial services providers operating in SA. Having said that, we believe the two entities defend their market position well, with competitive advantages obtained from vertically integrated businesses that supports a strong supply value chain, good distribution network, pricing advantages, coupled with rich proprietary data on their industry. Furthermore, track record of revenue stability has been good for both entities.
The risk score of 12 on SA Taxi is supported by the entity’s niche position as a provider of vehicle finance to the minibus taxi industry in South Africa. The risk score also balances the sound capital position at half year 2019, with GCR leverage and total capital ratio of 18% and 21% respectively. We expect GCR capital ratios to be maintained within strong ranges, supported by earnings growth and moderate loan growth. Risk position is broadly weak relative to sector average, reflected by credit losses of 3.4% which inadequately compares to top tier and some mid-tier banks whose credit losses through the cycle have averaged below 1%. Positively, due to the vertically integrated businesses, recoveries are well controlled and we think credit losses will be managed sustainably at the current level. Funding flexibility is credit positive for SA Taxi, supported by diversified funders including DFIs and securitisation vehicles. Furthermore, liquidity is considered to be fairly strong, supported by a significant amount of committed unutilized funds and strong expected future cash outflows. As a result, sources outweigh uses of liquidity by over 2.5x over the next 12months.
The risk score of 12.5 on TCRS is supported by the entity’s niche position as SA’s premier acquirer of non-performing consumer loans as principal and debt recoveries agent on contingency or fee-for-service basis, alongside increasing but relatively small penetration into the Australian and European markets. The risk score also balances the modest levels of leverage at year end 2018, with net debt to EBITDA of approximately 2x and funds from operations accounting for over 40% of net debt, but with free operating cash flow remaining negative due to the fairly rapid expansion of TCRS’ purchased book debts. We also factor in fairly strong earnings, with the EBIT margin over 30%, and adequate levels of liquidity.
The Stable outlook is supported by fair geographical diversification of the group, stable business position, good funding and liquidity profile, and our expectation that capital against risk will remain adequate.
A ratings improvement could arise from increased revenue generation by TCRS in low risk markets, improved business line diversification, and stronger internal capital generation. A downgrade in the group credit profile could stem from weakening SA operating environment, and reduction in capital adequacy.
|Primary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||SimbarakeC@GCRratings.com||+27 11 784 1771|
|Committee chair||Mathew Pirnie||Sector Head: Financial Institutions|
|Johannesburg, ZA||MathewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|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, June 2019|
|GCR Financial Institutions Sector Risk Score, July 2019|
Transaction Capital Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial||National||A-(ZA)||Stable||November 2016|
|Issuer Short Term||Initial||National||A1-(ZA)||Stable||November 2016|
|Issuer Long Term||Initial||International||BB-||Stable||November 2016|
Risk Score Summary
|Country risk score||8.5|
|Sector risk score||5.0|
|Management and governance||0.0|
|Capital and Leverage||0.5|
|Funding structure and Liquidity||0.5|
|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 rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Transaction Capital 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 rating.
Transaction Capital Limited 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 Transaction Capital Limited and other reliable third parties to accord the credit rating included:
- Audited financial results of Transaction Capital Limited as at 30 September 2018;
- Audited financial results of SA Taxi and TCRS as at 30 September 2018;
- Latest internal and/or external audit report to management;
- Industry comparative data.