Announcements

GCR downgrades Basil Read Holdings Limited’s rating to BB-(ZA); Outlook Negative.

Johannesburg, 13 September 2017 — Global Credit Ratings has today downgraded the national scale Issuer ratings assigned to Basil Read Holdings Limited to BB-(ZA) and B(ZA) in the long term and short term respectively; with the outlook accorded as Negative.

SUMMARY RATING RATIONALE

Global Credit Ratings (“GCR”) has accorded the above credit ratings to Basil Read Holdings Limited (“Basil Read”) based on the following key criteria:

The downgrade reflects the significantly weaker-than-expected half year results to June 2017, which have placed additional pressure on the group’s already fragile liquidity position, as highlighted in GCR’s credit rating report released in June 2017. GCR notes the limited prospects for a recovery in performance over the next 12 to 18 months, with cash flow generation likely to remain weak given the drag from distressed legacy projects and heightened project execution risks. The Negative outlook reflects the protracted challenging market conditions and the uncertainty with respect to Basil Read’s ability to execute on its planned restructuring to stabilise the business and to substantively strengthen its balance sheet.

Basil Read evidenced a material deterioration in operating performance in 1H FY17, with a R459m operating loss and a net loss of R474m reported, compared to the R64m and R54m profits achieved respectively at year-end FY16. This followed loss making legacy projects and poor project execution on roads works in particular. The overall order book stood at R10.7bn at 1H FY17, compared to R10.4bn at 1H FY16 (year-end FY16: R12.3bn), with note taken of a large mining contract that is currently under negotiation.

The underperformance was most pronounced in the road and construction divisions, with each reporting operating losses of R284m and R181m respectively in 1H FY17. Competitive pressures continue to adversely impact roads contract margins, whilst continued delays in finalising the Olifants River pipeline project resulted in further large provisions. Mining and Developments were the only divisions to sustain profitability, whilst St Helena, previously a strong earnings contributor, also registered a loss as result of currency fluctuations, as well as an unexpectedly high equipment and staff demobilisation costs.

The rating action also reflects the very weak liquidity profile associated with continuous negative free cash flow reported. Given the poor earnings and additional capex spend required to support the Mining division, gross debt rose from R458m at FY16 to R763m at 1H FY17, materially worsening the group’s credit risk metrics. Specifically, the group reflected net gearing of 85%, from a very narrow net ungeared position at FY16, while net debt to EBITDA continues to track an erratic trajectory.

In an effort to ease short term liquidity strain, a R61m bridging facility was recently been granted by the IDC, with an additional R89m in negotiation. Barring this, the group does not have any other committed credit lines at its disposal, limiting its financial flexibility and exposing it to refinancing risk. As such, management has proactively engaged with its primary bankers with a view to extend payment terms, whilst the group plans to raise c.R300m in a rights issue by year-end 2017. No binding commitments have yet been secured in term of the latter, although according to management major shareholders have provided positive feedback. Several other initiatives are also being prioritised to further boost funding over the medium term, including the disposal of non-core assets estimated at c.R150m, pledging sizeable unencumbered assets as collateral, as well as intensifying recovery efforts to release cash resources trapped in outstanding contract claims, albeit in GCR’s view, this is subject to high execution risk.

Further key elements to the group’s revised restructuring plan will focus on more selective project acceptances, which will likely see a material reduction in the roads order book, the closing out of remaining distressed projects and further rightsizing of the business. While GCR views the aforementioned positively, these actions do not fully offset the pressure from a challenging operating environment, with profitability only expected to stabilise on the back of stronger industry fundamentals in the medium term.

Should the planned funding transactions not materialise and cash flow strain remains evident and/or if the group’s operating performance deteriorates further, GCR could further lower Basil Read’s ratings. If the construction sector demonstrates clear signs of stabilisation or recovery, the rating outlook could stabilise.

NATIONAL SCALE RATINGS HISTORY    

Initial Rating (March 2008)

   
Long term: A-(ZA)

Short term: A2(ZA)

   
Outlook: Stable    

Last rating (June 2017)

Long term: BBB-(ZA)

Short Term: A3(ZA)

Outlook: Negative

   

ANALYTICAL CONTACTS

Primary Analyst    
Sheri Few    
Senior Analyst: Corporate Ratings    
(011) 784-1771    
few@globalratings.net    
     
Committee Chairperson    
Patricia Zvarayi    
Senior Analyst: Corporate Ratings    
(011) 784-1771    
patricia@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for rating corporate entities, updated February 2017

Basil Read Issuer rating reports (2008-June 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.

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

Balance Sheet Also known as 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.
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.
Downgrade The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.
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.
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.
Net Profit Trading/operating profits after deducting the expenses detailed in the profit and loss account such as interest, tax, depreciation, auditors’ fees and directors’ fees.
Order Book This refers to the portfolio of confirmed contracts/orders that a corporate entity has at any point in time, and is jargon typically associated with construction and manufacturing companies in reference to their prospective business.
Rating Outlook A Rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).
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.
Rights Issue One of the ways that a company can raise additional funds is to issue new shares. These must be first offered to current shareholders and a rights issue allows a shareholder to buy shares in proportion to the number already held. 
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.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
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.

Basil Read 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 ratings have been disclosed to Basil Read Holdings Limited with no contestation of the ratings.

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

  • Actual (unaudited) results for the six months to 30 June 2017
  • Analyst presentations
  • Industry comparative data
  • Other non-public information

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 Basil Read Holdings Limited’s rating to BB-(ZA); Outlook Negative.

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