Announcements

GCR downgrades Cottco Holdings Limited’s (prev. AICO Africa Limited) rating to BB(ZW); Outlook Neg

Johannesburg, 24 Oct 2014 – Global Credit Ratings has today downgraded the national scale issuer ratings assigned to Cottco Holdings Limited to BB(ZW) and B(ZW) in the long and short term respectively, with the outlook accorded as Negative. The ratings are valid until October 2015.

SUMMARY RATING RATIONALE

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

In F14, Cottco sold its controlling stake in Seedco and warehoused its Olivine shareholding, which saw its balance sheet reduced by 71% to US$84.3m and debt by 67% to US$41.6m. Cash proceeds from the disposals and a US$15.1m rights issue were invested into the cotton operations (after retiring a portion of legacy debt). At 129%, however, gearing remains well above an internal comfort level of 40% communicated to GCR previously, while debt serviceability has been weak or negative. Comfort is drawn from the fact that offshore facilities to fund the cotton crop are secured, although persistent negative cash flows will impede investment in much needed capex and erode the capital base further. According to management, Cottco is currently engaged in talks regarding a potential transaction, which if successful, could materially enhance its operations. In view of the uncertainty of the outcome of the proposed transaction and the unavailability of further details as to its scope, it has no current impact on the ratings.

The sale of Seedco (which underpinned group earnings over the review period) leaves operations particularly vulnerable to the cyclicality of the cotton business. Despite the indirect state interest (through NSSA’s 22% stake), regulatory support has been inconsistent, and given the poor national crop, this shortcoming contributed to a 70% slump in F14 cotton revenues to US$42m and a US$22.3m operating loss. While reports pertaining to the current marketing season indicate that the Agricultural Marketing Association has significantly tightened regulatory processes, the efficacy of the adopted changes would have to be sustained going forward to have a positive ratings impact in the medium term.

Capacity utilisation was severely curtailed by the loss of cotton acreage to other cash crops, reduced yields and side-marketing, which reduced F14 intake volumes by 77% to just 35,665t. Without critical mass, these and other exogenous factors, including commodity price volatility and poor rainfall, will continue to impede profitability. The export-oriented product range reduces exposure to the weak local economy and provides security for cheaper offshore trade finance. That being said, the group has been unable to secure term facilities due to limitations the local banking sector faces. Performance has also been impaired by the high effective interest rates, which have consumed most of the operating income from cotton operations over the review period.

The successful conclusion of the proposed transaction could result in a material capital injection and a reduction of gearing to manageable levels, placing upward pressure on the ratings. Curbing side-marketing losses will be crucial to attaining sustainable profits and cash flows, especially given the sensitivity of operations to global price movements and competition for acreage from other cash crops. However, failure to achieve critical mass will continue to drive ginning losses, negatively impacting debt serviceability. Despite the low volumes, exacerbated liquidity pressures due to price instability would constrain financial flexibility at the height of the working capital cycle, exerting downward pressure on the ratings.

NATIONAL SCALE RATINGS HISTORY

Initial rating: post dollarisation (Oct/2008)
Long term: BBB(ZW); Short term: A3(ZW)
Outlook: Stable

Last rating (Oct/2013)
Long term: BBB-(ZW); Short term: A3(ZW)
Outlook: Negative 

ANALYTICAL CONTACTS

Primary Analyst
Patricia Zvarayi
Senior Analyst
(011) 784-1771
patricia@globalratings.net

Committee Chairperson
Eyal Shevel
Sector Head: Corporate & Public Sector Debt Ratings
(011) 784-1771
shevel@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, August 2014
Cottco Holdings Limited rating reports, 2008-2013

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.

Cottco Holdings Limited did not fully participate in the rating process, but did comment on the rating report sent to management. GCR is satisfied that information disseminated by Cottco Holdings Limited and other public information available was sufficient.

The credit rating/s has been disclosed to Cottco Holdings Limited with no contestation of the rating.

The information received from Cottco Holdings Limited and other reliable third parties to accord the credit rating(s) included the 2014 audited annual financial statements (plus four years of comparative numbers), corporate governance and enterprise risk framework, industry statistics and regulatory 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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS REPORT

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.

Capital Base

The issued capital of a company, plus reserves and retained profits.

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.

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.

Dollarisation

Adoption of the U.S. dollar in part or all of an economy. It can occur informally and without official approval, or formally when a country stops issuing its own currency and uses only dollars.

Gearing

With regards 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, EBITDA or by the value of investments.

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.

Issued Capital

The par value of the proportion of authorised share capital that has been issued and allotted to shareholders in the form of shares.

Liquidity Risk

The risk that a company may not be able to take or meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets.

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.

Working Capital

Working capital usually refers to net working capital and is the resource that a company uses to finance day-to-day operations. It is calculated by deducting current liabilities from current assets.

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