Announcements

GCR downgrades Cottco Holdings Limited’s rating to CCC(ZW); Rating Watch

Johannesburg, 26 Oct 2015 — Global Credit Ratings has today downgraded the national scale long term rating assigned to Cottco Holdings Limited to CCC(ZW) and downgraded the national scale short term rating to C(ZW). In addition, the rating has been placed on ‘Rating Watch’. The ratings are valid until April 2016.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Cottco Holdings Limited (prev. AICO Africa Limited) based on the following key criteria:

Previously the sole cotton marketing agency and a wholly owned state entity, Cottco had the distinct first mover advantage when it was commercialised. However, this position has been significantly eroded amidst lax regulations, which have resulted in an influx of players and rampant side marketing. Combined with a massive loss of cotton acreage, poor yields and a sharp fall off in international prices, this has seen Cottco operate well below critical mass. Thus, cotton revenues plummeted to a new low of USD38m in F15 (F14: USD42m), from a high of USD138m in F13. Moreover, the lack of scale and prohibitive producer prices have seen persistent losses even at gross level. Combined with high interest charges, this has seen a cumulative loss before tax of USD62m over the past two years.

The ratings speak to Cottco’s severe difficulties in servicing debt obligations in F15. In this regard, the directors applied for judicial management in November 2014, but the process was terminated after the major creditors (financial institutions) proposed a scheme of arrangement.

The newly created Zimbabwe Asset Management Company (“ZAMCO”) is expected to take over Cottco’s legacy loans, and the government will resultantly control the entity. However, the ability of the government to support Cottco financially is considered limited. Further to this, Cottco’s financial position remains precarious at present, with it being technically insolvent. This was in spite of the fact that shareholders recently provided USD39m in capital, which was eroded by the large retained loss, resulting in negative equity at FYE15.

Cottco’s financial challenges are likely to be exacerbated by the adverse impact of the ongoing drought and depressed global cotton prices, which could drive protracted losses and impede any recovery. This is borne out by the interim results, which show a sharp fall off in turnover YoY. The implementation of the new buying model aimed at reducing side marketing and diversification plans is noted, albeit that some level of recapitalisation will be required to see a positive cash contribution to the group.

In view of the strained circumstances, a ratings upgrade is only likely if there is tangible financial support demonstrated by the government. Over the medium term, a recovery in earnings and a substantial reduction in debt is considered critical to place Cottco on a stable financial footing. To the extent that the state fails to take timeous remedial action to restructure Cottco’s debts and stem the operating losses, the company will struggle to meet its debt service obligations.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (October 2008)    
Long term: BBB(ZW); Short term: A3(ZW)    
Outlook: Stable    
     
Last rating (October 2014)    
Long term: BB(ZW); Short term: B(ZW)    
Outlook: Negative    
     

ANALYTICAL CONTACTS

Primary Analyst   Secondary Analyst
Patricia Zvarayi   Farai Mauchaza
Senior Analyst   Junior Analyst
(011) 784-1771   (011) 784-1771
Patricia@globalratings.net   Faraim@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 2015

Cottco Holdings Limited rating reports, 2008-2014

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

Bad Debt When a business recognises that a debt is unlikely to be repaid. It is classified as defaulted and written-off as an expense in the profit and loss account.
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.
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.
Financial Year The year used for accounting purposes by a company or government. It can be a calendar year or it can cover a different period, often starting in April, July or October. It can also be referred to as the fiscal year.
Insolvent A company becomes insolvent when it is unable to pay its debts as they fall due, or when its liabilities exceed the value of its assets. An insolvent company must undergo bankruptcy in order to either liquidate or restructure.
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.
Portfolio A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.

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 (prev. AICO Africa 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 Cottco Holdings Limited (prev. AICO Africa Limited) with no contestation of the rating.

The information received from Cottco Holdings Limited (prev. AICO Africa Limited) and other reliable third parties to accord the credit rating(s) included;

  • Unaudited financial results of Cottco company per 31 March 2015;
  • Audited financial statements for the group 2010-2014 financial years;
  • Corporate governance and enterprise risk framework;
  • Industry comparative data;
  • Management accounts for six months to 31 September 2015.

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.

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