Johannesburg, 18 Dec 2015 — Global Credit Ratings has today downgraded the national scale long term rating assigned to Gijima Limited to BB-(ZA) and affirmed the national scale short term rating of B(ZA); with the outlook accorded as Stable.
The Ratings accorded to Gijima have subsequently been withdrawn as the group has now delisted from the JSE.
SUMMARY RATING RATIONALE
Global Credit Ratings has accorded the above credit rating(s) to Gijima Limited based on the following key criteria:
Group revenue remained flat in F15, (11% below budget), but earnings were impacted by the historically high cost base coupled with the loss making projects. Thus, despite rationalisation efforts, EBITDA and operating profit margins have been negative since F12, albeit that the EBITDA loss reduced. Revenue is likely to be flat or show only moderate growth in F16, but further cost savings (and the completion of loss making contracts) should reduce the operating loss, and potentially translate into a profit.
Gijima undertook a R100m rights issue in November 2014, aimed at recapitalising the business. This was followed by an offer to minority shareholders, which saw the Guma Group acquire the shares it did not already own and delist Gijima from the JSE during F15. However, the net loss reported in F15 eroded much of the proceeds. To address undercapitalisation, Gijima has secured a further R130m investment from the IDC in the form of a preference share issue. The transaction should provide some financial flexibility to grow operations and reduce the debt burden. However, top line growth is required for Gijima to return to a financially sustainable position.
The renegotiated loan terms of Gijima’s securitisation relieves liquidity pressure and mitigates refinancing risk, as debenture repayments will now begin in June 2017 (previously 2015). While the persistent losses and negative equity position make gearing metric analysis less meaningful, the negative debt serviceability and interest coverage metrics indicate an unsustainable financial position.
Positive rating action will be dependent upon the group securing significant new contracts, thereby increasing revenue and returning to profitability. Further to this, strong cash generation would provide the much needed liquidity to support working capital requirements and allow Gijima to address its high level of debt. In contrast, continued losses, resulting in the further erosion of equity would bode negatively for the group. Persistently negative debt serviceability and interest coverage metrics would also be indicative of financial stress.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (August 2008)|
|Long term: BBB(ZA); Short term: A3(ZA)|
|Last rating (December 2014)|
|Long term: BB(ZA); Short term: B(ZA)|
|Primary Analyst||Secondary Analyst|
|Eyal Shevel||Farai Mauchaza|
|Sector Head: Corporate Ratings||Junior Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for Rating Corporate Entities, February 2015.
Gijima Group Limited Rating Reports, 2008-2014
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY
|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.|
|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.|
|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 Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|JSE||JSE Limited (previously the JSE Securities Exchange and the Johannesburg Stock Exchange) is a licenced exchange under the Securities Services Act of 2004 (South Africa).|
|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 Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|Preference Share||Preference or preferred shares entitle a holder to a first claim on any dividend paid by the company before payment is made on ordinary shares. Such dividends are normally linked to an interest rate and not determined by company profits. Preference shares are normally repayable at par value in the event of liquidation. They do not usually carry voting or pre-emptive rights. Preference shares can be redeemable or perpetual.|
|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.|
|Stock Exchange||A market with a trading-floor or a screen-based system where members buy and sell securities.|
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; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Gijima 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 Gijima Limited with no contestation of the rating.
The information received from Gijima Limited and other reliable third parties to accord the credit rating(s) included;
- Reviewed financial results of Company per 30 June 2015;
- Four years audited financial results for 2010-2014;
- Management presentations;
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework; and
- Industry comparative data
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.