Johannesburg, 18 August 2016 — Global Credit Ratings has accorded national scale ratings to Quince Capital (Proprietary) Limited of A(ZA) and A1(ZA) in the long and short term respectively; with the outlook accorded as Stable. Furthermore, Global Credit Ratings has assigned an international scale local currency rating of BB+ to Quince Capital (Proprietary) Limited; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
The ratings of Quince Capital (Proprietary) Limited (“Quince Capital”, “the company”) reflect the credit quality of its captive and established asset-based financing business, experienced management, stable financial profile, robust capitalisation and returns, and support from its listed parent, Reunert Limited (“Reunert”, “the group”).
GCR considers Quince Capital to be strategically important to the group (providing revenue diversification and facilitation of Nashua’s office automation equipment sales). The company receives support from Reunert in respect of capital (via debt subordination/dividend policy), funding, a captive pipeline, and shared services. As such, the company’s ratings receive uplift for extraordinary parental support, and are linked to an assessment of the group’s credit standing.
Average loan growth slowed to 8.3% in F15 (F14: 19.2%), feeding through to more muted increases in operating income (11.8% in F15 vs. 20.1% in F14). Lower impairment charges following resolution of specific claims raised in F14, and modest loan book growth were largely offset by an above-inflation increase in operating costs due to IT infrastructure upgrades and a larger management team, yielding pre-tax profit growth of 13.3% (F14: 26.9%) to R126.2m.
Despite slowing loan growth, rising competitive pressures, and stress in the South African economy, Quince Capital continued its strong internal capital generation, supporting solid capitalisation (capital/assets ratio of 17.5% at FYE15). In F15, ROaA increased to 3.9% (F14: 3.7%) and ROaE declined slightly to 23.5% (F14: 25.8%).
Credit exposure is primarily to equipment rental end-users, or the rental contract originator (franchise/dealer), through full or partial recourse arrangements. Strong credit vetting/monitoring, a low-risk business model and high collateral resale values have historically kept credit losses modest/stable, and the company carries adequate provisions. The challenging operating environment has somewhat increased credit loss levels reported in 3Q F16 (vs. F15), but these remain within management’s targeted levels and are both fully collateralised, and covered by general provisions.
The company’s funding strategy aims to balance group financial advantages of using captive funding, against the diversification benefits of utilising a component of external funding. Since F14, the company has availed itself of bank facilities, loans and interest rate swaps to manage funding, interest rate and liquidity risks. However, given Reunert’s highly liquid balance sheet, group funding was favoured during F15.
The strong rating (including parental support) juxtaposed against the company’s modest size, limits the likelihood of rating increases in the medium term. Enhanced market position, and/or funding diversification would enhance the standalone credit profile. The ratings may be downgraded following a material deterioration in trading performance, credit quality, financial profile, or diminished support from and/or credit profile of the group.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE LC RATINGS HISTORY|
|Initial rating (August 2013)||Initial rating (August 2013)|
|Long-term: A+(ZA); Short-term: A1(ZA)||Long-term: BBB-|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2015)||Last rating (December 2015)|
|Long-term: A+(ZA); Short-term: A1(ZA)||Long term: BB+|
|Outlook: Stable||Outlook: Stable|
|Sector Head: Financial Institution Ratings|
|Senior Credit Analyst|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
Global Criteria for Rating Finance and Leasing Companies, updated March 2016
Quince Capital rating reports (2013-15)
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 rating was 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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Quince Capital (Proprietary) 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 credit rating/s has been disclosed to Quince Capital (Proprietary) Limited with no contestation of the rating.
The information received from Quince Capital (Proprietary) Limited and other reliable third parties to accord the credit rating(s) included:
- Audited financial results of the company to 30 September 2015 (plus four years of comparative numbers);
- Audited financial results of the group to 30 September 2015 (plus four years of comparative numbers);
- Interim financial results of the group to 31 March 2016;
- Budgets for Quince Capital (Proprietary) Limited for F16, and management accounts to 30 June 2016;
- Latest internal and/or external audit reports to management;
- A breakdown of facilities available and related counterparties; and
- Corporate governance and enterprise risk framework.
The ratings above were solicited by, or on behalf of, Quince Capital (Proprietary) Limited, 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.|
|Balance Sheet||Also known as a Statement of Financial Position. A statement of a company’s assets and liabilities provided for the benefit of shareholders and regulators. It gives a snapshot at a specific point in time of the assets the company holds and how they have been financed.|
|Capital||The sum of money that is invested to generate proceeds.|
|Collateral||Asset provided to a creditor as security for a loan.|
|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.|
|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.|
|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.|
|Interest Rate||The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|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.|
|National Scale Rating||Provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Recourse||The right to demand payment/collect from the maker or endorser of a negotiable instrument.|
|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.|
|Swap||An exchange of payment streams between two parties for their mutual benefit. Swaps can involve an exchange of debt obligations, interest payments or currencies, with a commitment to re-exchange them at a specified time.|
|Yield||Percentage return on an investment or security, usually calculated at an annual rate.|
For a detailed glossary of terms utilised in this announcement please click here
GCR assigns a rating of A(ZA) to Quince Capital (Proprietary) Limited; Outlook Stable.