Johannesburg, 29 Jun 2015 – Global Credit Ratings has today downgraded the national scale long term rating assigned to ABC Holdings Limited to BB+(BW) and affirmed the national scale short term rating of A3(BW); with the outlook accorded as Stable. The rating(s) are valid until 06/2016.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit rating(s) to ABC Holdings Limited’s (“ABCH” and/or “the group”) based on the following key criteria:
The ratings reflect ABCH’s weak, albeit recovering profitability and deterioration in asset quality. The aforementioned constraints are partially offset by the takeover of ABCH by Atlas Mara Limited (“Atlas Mara”), and the group’s growing franchise value developed across the Southern African Development Community and East African regions. The ‘Stable’ outlook is a reflection of the steps being taken to drive the recovery in operating performance and asset quality metrics, and to maintain and build capital.
In August 2014, Atlas Mara completed its acquisition of ABCH. The new shareholders are expected to drive the group’s next growth phase and stronger inroads into the retail sector, as well as provide much needed operational, capital and funding support to its subsidiaries. Atlas Mara has since injected USD100m into the group (classified as a non interest bearing loan) to recapitalise the subsidiaries, and secured USD125m in lines of credit from reputable development finance institutions for on-lending to small and medium enterprises and corporates.
ABCH’s consolidated capital and reserves contracted 35.0% to BWP920.5m at FYE14, mainly due to a net loss of BWP481m recorded for the year. Consequently the capital/assets ratio dropped to a five year low of 5.3%. With the exception of Tanzania, the total risk weighted capital adequacy ratio (“CAR”) for all the subsidiaries was well above the regulatory minima at FYE14. Following capital injections totalling USD27m into Tanzania from Atlas Mara via the parent, and post finalisation of the capitalisation process, Tanzania reported a total CAR of 15.7% (regulatory minimum of 12%) on 30 April 2015, based on monthly returns submitted to the central bank.
Credit quality deteriorated further during F14, largely emanating from the Mozambique, Tanzania, Zimbabwe and Zambia operations. The deterioration was on the back of challenging operating conditions in some target markets and a strategic review (loan clean-up and stricter classification) of the loan portfolio. Consolidated impaired loans grew by 71.9% at FYE14 (FYE13: 27.8%). Exacerbated by the slowdown in loan growth, gross impaired loans increased to 15.8% (FYE13: 10.0%) of total gross loans and advances at FYE14. Impairment coverage (by provisions) declined to 48.1% at FYE14 (FYE13: 54.7%), pre-collateral. Further, given a significant decline in capital at FYE14, the net non-performing loan (“NPL”) and net NPL/capital ratios climbed to 8.9% (FYE13: 4.8%) and 108.4% (FYE13: 35.8%) at FYE14 respectively. The group has set up a special unit (collection/restructuring) to work through problem loans across the group and stabilise operating performance.
ABCH reported a pre-tax operating loss of BWP440.8m for F14, down from a pre-tax profit of BWP254m for F13. The poor earnings performance was due to high credit costs (impairment charges grew by 98.2%), as well as restrained loan growth, high operating and funding costs, and lower non-interest income. The liquid assets/short-term funding ratio of 25.2% at FYE14 (FYE13: 22.7%) helps mitigate liquidity risk to a degree.
A ratings upgrade would be premised on the successful repositioning of the group, influenced by the new shareholder’s growth aspirations, financial support, experience and expertise. Further, appropriate deployment of capital/funding, a positive earnings trend (while maintaining credit protection factors), the diversification of income streams and a reduction in funding costs (on the back of the retail strategy), may have a positive impact on the ratings. However, continued pressure on profitability from higher credit costs, the deterioration of liquidity and capital metrics in tandem with an escalation of losses from the loan portfolios, and adverse macroeconomic, regulatory and political environments across operating jurisdictions, may necessitate additional negative rating action.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Dec/2004)
Long term: BBB-(BW); Short term: A3(BW)
Last rating (Jun/2014)
Long term: BBB-(BW); Short term: A3(BW)
Sector Head: Financial Institution Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2015
ABCH reports (2004-14)
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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
ABC Holdings 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 ABC Holdings Limited with no contestation of the rating.
- Audited financial results of the group as at 31 December 2014
- Unaudited interim results of the group as at 30 April 2015
- Four years of comparative audited financial results/statements
- Budgeted financial statements for 2015
- Latest internal and/or external report to management
- Reserving methodologies
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, ABC Holdings 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 Quality||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 (i.e. being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|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.|
|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|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.|
|Collateral||Asset provided to a creditor as security for a loan.|
|Corporate Governance||Corporate governance broadly refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|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.|
|Credit Rating Agency||An entity that provides credit rating services.|
|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.|
|Creditworthiness||An assessment of a debtor’s ability to meet debt obligations.|
|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.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Financial Statements||Presentation of financial data including balance sheets, income statements and statements of cash flow, or any supporting statement that is intended to communicate an entity’s financial position at a point in time.|
|Franchise||Business or banking franchise; a bank’s business.|
|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.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|Insolvent||When an entity’s liabilities exceed its assets.|
|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.|
|Liabilities||All financial claims, debts or potential losses incurred by an individual or an organisation.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|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 Rating||A 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||The national scale 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.|
|Non-Performing Loan||When a borrower is overdue, typically 90+ days in arrears or as defined by the lender, or in the transaction documents.|
|Off Balance Sheet||Off balance sheet items are assets or liabilities that are not shown on a company’s balance sheet. They are usually referred to in the notes to a company’s accounts.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Redemption||The repurchase of a bond at maturity by the issuer.|
|REPO||In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.|
|Securities||Various instruments used in the capital market to raise funds.|
|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.|
|Short Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|