Johannesburg, 07 Nov 2018—Global Credit Ratings has today downgraded the long and short term national scale Issuer ratings assigned to Group Five Limited to CCC(ZA) and C(ZA) respectively, with the outlook accorded as Negative.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Group Five Limited (“Group Five” or “the group”) based on the following key criteria:
The ratings are significantly constrained by a cumulative attributable loss to equity shareholders of R2.2bn in the two years to FY18. Group losses in FY18 were mostly driven by the R1.3bn in operating losses incurred on the Kpone contract, whose plant is currently at the commissioning phase. Group Five’s net cash position declined to R319m at FY18, from relatively robust levels that had previously supported stronger ratings. Unutilised guarantees have also reduced materially. Successive losses and substantial cash outflows have driven negative earnings-based gearing and debt service metrics, with a recovery only expected with the normalisation of the earnings profile.
GCR notes the creditors standstill agreement in place for the tenor of the secured bridging facilities agreement (12 months to May 2019). The bridging facilities and creditors standstill are, however, transient agreements that emphasise the tenuous liquidity position, which can only be effectively remedied by sustained cash generation. The group continues to meet its financial covenants within the bridging facility agreement (in respect of certain NAV and unrestricted cash thresholds, as well as an LTV at/below 50%), albeit potential non-performance remains a risk that could impact the facilities. GCR is also concerned about the reputational fallout and potential for further liquidity stress that could arise due to Kpone, whose commissioning and handover have fallen behind schedule.
GCR has nonetheless noted the enhanced execution of Group Five’s Construction cluster’s projects and the restructuring of operations (including the rightsizing of staff, sale of the Manufacturing cluster and selected plant and equipment, as well as the closure or material downsizing of a number of businesses to focus on higher margin, core competencies), which management expects to support a return to positive free cash flows. The board has resolved to dispose of at least 51% of Construction SA to an empowered entity, which would further streamline operations, potentially release much needed capital, while materially reducing the group’s exposure to the weak domestic contracting environment.
Cognisance has also been taken of broader initiatives to ensure sustainability, including the partial disposal of the European investments and concessions investment to settle debt drawn down on R650m in secured bridge facilities provided by a consortium of domestic banks. While this will materially reduce gross gearing and alleviate the pressure of a short-dated debt redemption profile, the partial sale of a strongly performing asset to discharge debt is negatively considered. That said, GCR has noted the stronger free cash flows expected to derive from the residual interest as the European concessions business achieves greater scale, and the relative resilience of the underlying Operations & Maintenance order book. Other ongoing liquidity enhancement initiatives (on the back of an externally reviewed liquidity model and two-year group budgets) include expected recoveries from material claims awarded to Group Five, partial realisation of the pension fund surplus and the release of long outstanding debtors.
Significant downside risks, particularly liquidity and reputational challenges facing the group, inform the negative rating outlook. Further losses/erratic profitability due to (inter alia) weak contract execution, project disruptions, failure to secure contract awards timeously and/or failure to meet liquidity targets would further weaken credit protection factors. Looking ahead, upward rating action could derive from a return to sustainable cash profitability, on the back a profitable order book, the extensive restructuring of operations and rigour of risk management protocols. This is predicated on Kpone being commissioned and handed over soon, and the bridge facility being repaid from the proceeds of the service concessions stake sell down. A focus on core competencies as the operating environment improves, supporting sound free cash flows through the cycle, would also bode positively.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2006)||Last rating (May 2018)|
|Long term: A(ZA); Short term: A1(ZA)||Long term: BB(ZA); Short term: B(ZA)|
|Outlook: Stable||Outlook: Rating Watch|
|Primary Analyst||Committee Chairperson|
|Patricia Zvarayi||Eyal Shevel|
|Senior Analyst||Sector Head: Corporate & Public Sector Debt Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Group Five Limited rating reports and market alerts, 2006-18
RATING LIMITATIONS AND DISCLAIMERS
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|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|Downgrade||The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding.|
|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.|
|Going Concern||An accounting convention that assumes a company will continue to exist and trade normally for the foreseeable future. In practice this is likely to mean at least for the next 12 months.|
|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.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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 Watch||Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.|
|Redemption||The repurchase of a bond at maturity by the issuer.|
|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.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|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.|
|Tenor||The time from the value date until the expiry date of an instrument, typically a loan or option.|
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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 are based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings are 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.
Group Five 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 Group Five Limited.
The information received from Group Five Limited and other reliable third parties to accord the credit rating(s) included:
- Group Five Limited 2018 Annual Financial Statements and results presentation booklet
- Four years comparative audited results
- 06.11.18 10:53 GROUP FIVE LIMITED – Kpone gas-and-oil-fired combined cycle EPC power plant update and cautionary announcement
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 Group Five Limited’s ratings to CCC(ZA), outlook Negative