Johannesburg, 30 October 2018 — Global Credit Ratings (“GCR”) has affirmed Untu Capital Limited’s national scale ratings of of BB(ZW) and B(ZW) in the long term and short term respectively; with the outlook placed on negative ratings watch.
SUMMARY RATINGS RATIONALE
The ratings of Untu Capital Limited (“Untu” or “the company”) balance its supportive leverage, broadly neutral risk position, and improving returns. The ratings are constrained by the small size and relatively short operating history which highlights a weak competitive positioning, weak and uncertain operating environment; and a moderate cash flow and liquidity profile.
Untu is a wholly owned subsidiary of Untu Holdings Limited incorporated in Botswana. As a Microfinance Institution (“MFI”), Untu provides funding to Zimbabwean micro, small and medium sized enterprises (“MSMEs”), which have limited access to bank/traditional financing. Untu is ranked 5th in the MFI sector in terms of loans and advances. Untu has a mono-geography distribution channel limited to 9 branches in 5 cities, 2 merchant arrangements and 10 sales agents which it augments with technology. The company’s revenue stability has been fairly good as exhibited by the consistency of, and revenue growth despite the impact of the interest rate cap.
GCR considers the leverage levels of the company to be largely supportive of the rating. The debt to equity ratio as at June FY18 was 2.5x, against a covenant limit of 5x. We believe the comparatively smaller nominal size of Untu’s capital greater exposes the company to single event risks or regulatory shock. GCR expects the company’s leverage to range between 2.3x and 2.8x, the expected increase in lending being balanced by fairly strong internal capital generation (16-18% over the same time period) despite the prevailing economic headwinds. We expect Untu to return around 15% of equity and 5% of assets over the next 2 years.
The risk position of Untu is broadly neutral for the ratings. The company’s cost of risk has been somewhat volatile over the last 3 years; the general trend has been the company reducing the loan loss provisioning after a significant increase in 2015. As at June FY18, the loan loss reserves covered 5% of total loan book (FY15: 20%). GCR considers the reserving to be just adequate at these levels, factoring our expectations of the long-term normalized cost of risk. The diversification of the loan book is good. However, we expect the client mix to shift more concentrations towards the SME sector in line with company strategy.
As a non-deposit taking institution, Untu raises its money through debt securities. The company successfully raised USD5m on the Zimbabwean fixed instruments exchange using a 50% post default guarantee from African Guarantee Fund. The issuance was oversubscribed allowing Untu to diversify its funding base. Untu is not exposed to foreign currency risk having successfully retired all foreign lines of credit. Untu holds minimal liquid assets on the balance sheet so it is reliant on the receipts from its loan book for liquidity. Positively, collections have proven to be largely stable so there is headroom for its debt repayments. The company’s funds from operations to net debt ratio deteriorated to 13.6% in FY17 (FY16: 32.1%). The assessment of cash flow and liquidity is viewed in the light of an increase in leverage as Gross Debt to Earnings Before Interest and Tax (EBIT) was 5.20 at FY17 (FY16: 2.84). The liquidity risk is also mitigated by standing lines of credit with local banks which the company can draw down on. GCR expects liquidity buffers to improve as growth stabilises in the next 2 years.
The upside rating potential is limited, outside a substantial improvement in the macroeconomic environment. A negative rating action could follow deterioration in financial leverage, breach of covenants and/or deterioration in liquidity.
|NATIONAL SCALE RATINGS HISTORY|
|Initial/last rating (September 2017)|
|Long-term: BB(ZW); Short-term: B(ZW)|
|Primary Analyst||Secondary Analyst|
|Vimbai Muhwati||Kudzanai Samanga|
|Credit Analyst||Junior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
|Sector Head: Financial Institutions Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2017
Global Criteria for Rating Microfinance Institutions, updated March 2017
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 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 rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Untu Capital Limited participated in the rating process via 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 Untu Capital Limited.
The information received from Untu Capital Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results of the company to 31 December 2017 (plus four years of comparative numbers);
- Unaudited management accounts as at 30 June 2018;
- Budgets for 2018-2021;
- A breakdown of facilities available and related counterparties;
- Corporate governance and enterprise risk framework; and
- Information specific to the rated entity or industry.
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.
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.|
|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.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Equivalent||An asset that is easily and quickly convertible to cash such that holding it is equivalent to holding cash.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Customer Deposit||Cash received in exchange for a service, including safekeeping, savings, investment, etc. Customer deposits are a liability in a bank’s books.|
|Diversification||Spreading risk by constructing a portfolio that contains different investments, 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.|
|Equity||Equity (or shareholders’ funds) 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.|
|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.|
|Initial Public Offering||The first offering of shares to the public by a privately or state owned company. IPOs are used by companies to raise new funds, or to achieve a listing on a stock exchange.|
|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.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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.|
|Past Due||Any note or other time instrument of indebtedness that has not been paid on the due date.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|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.|
|Tier 1 Capital||Primary capital consists of issued ordinary share capital, hybrid debt capital, perpetual preference share capital, retained earnings and reserves. This amount is then reduced by the portion of capital that is allocated to trading activities and other regulatory deductions.|
For a glossary of terms please click here
GCR affirms Untu Capital Limited’s rating of BB(ZW); Negative Rating Watch.