Announcements

GCR downgrades Adcorp Holdings Limited’s rating to BBB-(ZA), and places it on Rating Watch.

GCR downgrades Adcorp Holdings Limited’s rating to BBB-(ZA), and places it on Rating Watch.

Johannesburg, 09 June 2017 — Global Credit Ratings has today downgraded the national scale, long term Issuer rating assigned to Adcorp Holdings Limited to BBB-(ZA), and affirmed the short term Issuer rating of A3(ZA). The ratings have been placed on Rating Watch, to be reviewed by 30 November 2017.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit ratings to Adcorp Holdings Limited (“Adcorp, or the group”) based on the following key criteria:

GCR is particularly concerned about the EBITDA to interest covenant of 4x, which although not breached to date, will remain under significant pressure at current debt levels. Refinancing risk is also elevated, due to bond and AUD-denominated debt maturities, with 64% of borrowings short-dated at FY17, and a further R400m maturing in March 2018. As such, the ratings have been placed on Rating Watch, and will continue to be monitored closely. Adcorp intends to dispose of certain non-core assets to reduce debt in the short term, while the planned restructure of bank facilities will enable the refinancing of DMTN notes as they mature.

Adcorp continues to face challenging conditions across its territories, with local operations still clawing back volumes lost in the wake of changes to the Labour Relations Act. In addition, its international operations registered a much weaker than expected performance in FY17, due to the commodity price downturn and the resultant mothballing of several projects in oil & gas in particular. Specifically, the group reported R104m in trading and foreign exchange losses related to Africa and Dare operations (FY16: R67m profit), while R33m was spent on restructuring local businesses.

Adcorp shelved a second wave of international expansion and capital-raising plans headed from Singapore, which would have seen a reduction in absolute debt, while easing debt service and covenant pressures. The costs associated with the Asia funding strategy, which has since been terminated, together with the aforementioned losses, a negative movement in share-based payments, adverse tax effects related to the African businesses, and R132m in software and goodwill impairment charges, drove an unforeseen attributable loss of R162m, the first loss reported in 10 years.

Management has implemented several remedial measures, including further cost rationalisation, focus on relationships with top tier clients accounting for c.90% of local revenue, refinement of internal processes, and the scaling back of non-profitable operations in the rest of Africa (“RoA”). As such, Adcorp expects a recovery in EBITDA and earnings from FY17, assuming a sustained rebound in Dare’s operations, and steady SA volumes.

Although the rapid, acquisition-led growth over the five years under review was largely equity-funded, it contributed to debt peaking at R2bn at FY16, or 1.8x the FY12 total, and well above legacy levels (FY08: R357m). Debt eased to R1.8bn at FY17, but gross and net gearing still climbed to 197% and 119% (FY16: 171%; 99%), while gross and net debt to EBITDA metrics materially underperformed, at 600% and 363% respectively (FY16: 367%; 212%).

Cash generated from operations nearly halved YoY, but a substantial release from debtors saw operating cash flows double to R269m in FY17 and bolstered the cash conversion ratio to 178% (FY16: 63%). While liquidity remains constrained across key markets, and clients continue to press for longer credit terms, GCR notes efforts to manage debtors’ days within the 47-day target (FY17: 45 days) and other internal protocols to mitigate credit risk.

Looking ahead, a reduction in debt and the restructure of bank facilities, supporting an improvement in the debt maturity profile is required to sustain the ratings. In the medium term, positive rating pressure could arise from the proven ability to sustainably reduce costs and stabilise volumes, leading to a recovery in margins and earnings despite the difficult environment. Conversely, a protracted deterioration in collections and/or persistently elevated debt and gearing beyond management targets, and/or economic and regulatory pressures that significantly curtail cash flows and liquidity would warrant negative rating action.

NATIONAL SCALE RATINGS HISTORY  
   
Initial rating (December 2012)  
Long term: BBB(ZA); Short term: A3(ZA)  
Outlook: Stable  
   
Last rating (May 2017)  
Long term: BBB(ZA); Short term: A3(ZA)  
Outlook: Negative  

ANALYTICAL CONTACTS

Primary Analyst    
Patricia Zvarayi    
Senior Analyst    
(011) 784-1771    
Patricia@globalratings.net    
     
Committee Chairperson    
Eyal Shevel    
Sector Head: Corporate Ratings    
(011) 784-1771    
Shevel@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for rating corporate entities, updated February 2017

Adcorp Holdings Limited Issuer rating reports, 2012-16

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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

Bond A long-term debt instrument issued by either a company, institution or the government to raise funds.
Capital The sum of money that is invested to generate proceeds.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Commodity Raw materials used in manufacturing industries or in the production of foodstuffs. These include metals, oil, grains and cereals, soft commodities such as sugar, cocoa, coffee and tea, as well as vegetable oils. 
Covenant A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ 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.
Credit Risk The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.
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.
Downgrade The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.
Equity The holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.
Gearing With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.
Goodwill Arises upon the sale/acquisition of a business and is defined as an established entity’s reputation, which may be regarded as a quantifiable asset and calculated as the price paid for a company over and above the net value of its assets. Negative goodwill refers to a situation when the price paid for a company is lower than the value of its assets.
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.
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. 
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.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Maturity The length of time between the issue of a bond or other security and the date on which it becomes payable in full.
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.
Operating Cash Flow A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.
Rating Watch Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.
Refinancing The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.
Risk The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.
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.


SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating process 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 ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Adcorp Holdings Limited participated in the rating process via face-to-face management meetings, teleconferences,5 as well as 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 Adcorp Holdings Limited with no contestation of the ratings.

The information received from Adcorp Holdings Limited and other reliable third parties to accord the credit ratings included:

  • the 2017 audited annual financial statements (plus four years of comparative numbers);
  • a breakdown of facilities available and details of the SA operations’ indebtedness as at 31 March 2017;
  • management’s presentation to the Adcorp Board in May 2017;
  • the South African debtors’ profile as at 31 March 2017; and
  • the corporate governance and enterprise risk framework.

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.

GCR downgrades Adcorp Holdings Limited’s rating to BBB-(ZA), and places it on Rating Watch.

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