Johannesburg, 29 July 2016 -Global Credit Ratings has today downgraded the national scale debt ratings for East African Cables Limited to BBB(KE) and A3(KE) in the long term and short term respectively; with the outlook accorded as Negative. Concurrently the Commercial Paper rating has also been downgraded to A3(KE).
The ratings accorded to East African Cables Limited have subsequently been withdrawn at the request of the client.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to East African Cables Limited (“EAC”) based on the following key criteria:
EAC is a manufacturer and supplier of transmission cabling for power utilities and telecommunications cables in East Africa. While EAC has traditionally received support from its parent Trans-Century Limited, this has been curtailed by the severe financial strain faced by Trans-Century Limited. As a result, EAC has been required to pay large dividends, whilst also gearing up to complete its substantial capex programme over the past three years.
Aside from the financial constraints caused by its parent, EAC also faced a much more difficult operating environment, as adverse economic conditions and interruptions to production resulted in a 27% decline in revenue to KES3.7bn in F15 (compared to a 13% increase in F14). This, together with higher staff costs, a greater proportion of lower margin aluminium cable sales, and a progressively weakening Kenyan shilling further eroded profitability. Thus, gross profit fell 53% to KES614m (at much lower margin of 16.5%), whilst EAC reported an EBITDA loss of KES90 and operating loss of KES304m. Having a further substantial impact on earnings in F15 was the large KES312m foreign exchange loss, associated with the group’s substantial USD debt, as well as the KES329m impairment to receivables. As a result, after accounting for a tax credit, the group reported a net loss after tax of KES741m (F14: KES341m profit). While EAC is likely to show an improvement in 1H F16, reverting to a small but positive operating profit, the group is still likely to report a net loss due to the high financing costs.
Debt rose from KES1.2bn at FYE12 to peak at KES3.1bn at FYE15 (of which 61% was short term) to fund the substantial capex requirements. In line with this, gearing has trended upwards, with net gearing increasing to a review period high of 100% at FYE15 (FYE14: 86%). Following the uptick in net debt to EBITDA to 349% at FYE14, this metric was negative at FYE15. Operating cash flow coverage of gross debt has been erratic over the review period, with a negative value reported at FYE13, moderate coverage of 17% at FYE14, and a lower 1% at FYE15. Also indicating a weak liquidity profile was the group’s current ratio, which reached a review period low of 0.9x in F15 (F14:1.2x).
EAC’s recovery is dependent on the completion of capex projects and the demonstrated ability to raise production and thereby generate higher revenues. In addition, GCR considers it critical that EAC retains any profits to enable the company to reduce gearing and thus stabilise its own financial position.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (November 2007)|
|Long term: A-(KE); Short term: A2(KE)|
|Commercial paper: n.a|
|Last rating (July 2015)|
|Long term: BBB+(KE); Short term: A2(KE)|
|Commercial paper: A2(KE)|
|Sector Head: Corporate and Public Sector Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, updated February 2016.
EAC rating reports (2007-2015)
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|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.|
|Current Ratio||A measure of a company’s ability to meet its short-term liabilities and is calculated by dividing current assets by current liabilities. Current assets are made up of cash and cash equivalents (‘near cash’), accounts receivable and inventory, while current liabilities are the sum of short-term loans and accounts payable.|
|EBITDA||Earnings before interest, taxes, depreciation and amortisation is useful for comparing the income of companies with different asset structures as it calculated before excluding non-cash expenses related to assets.|
|Gross Profit||Gross profit is the difference between company revenues or sales and the cost of sales, before accounting for administrative and financing costs.|
|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.|
|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.|
|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.|
|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.|
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.
East African Cables Limited participated in the rating process, by providing information, but the interaction with management has been limited.
The credit ratings has been disclosed to East African Cables Limited with no contestation of the ratings.
The information received from East African Cables Limited and other reliable third parties to accord the credit rating(s) included:
- Audited financial results of EAC per 31 December 2015 (plus four years of comparative numbers
- Corporate governance and enterprise risk framework
The ratings above were previously solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR downgrades East African Cables Limited’s rating to BBB(KE); Withdraws Ratings