Johannesburg, 12 December 2019 – GCR Ratings (“GCR”) has downgraded the long and short term national scale Issuer ratings accorded to Jasco Electronics Holdings Limited (“Jasco” or “the group”) to CCC(ZA) and C(ZA) from BB-(ZA) and B(ZA), respectively, with a Negative Watch.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Jasco Electronics Holdings Limited||Issuer Long Term||National||CCC(ZA)||Negative Watch|
|Issuer Short Term||National||C(ZA)|
On May 22, 2019, GCR announced that it had released a new rating framework and sectoral criteria. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the Jasco rating review under the new Criteria and the ratings have been removed from ‘Under Criteria Observation’.
The rating downgrade reflects GCR’s opinion that we consider Jasco to be vulnerable to restructure or default over the next 12 months, due to high refinancing risk and a constrained liquidity profile. GCR has factored in the cash proceeds expected from the sale of the Electrical Manufacturers (“EM”) business and planned release of cash from other group entities/ventures to allow for the progressive settlement of a sizeable portion of group debt during 2020. Failure to realise these proceeds timeously would warrant further negative rating action.
Jasco presents significantly curtailed liquidity despite the condonement of covenant breaches and the effective rescheduling of bond and Bank of China facility maturities to 1Q 2021. Specifically, the repayment of the R46m bond and the group’s ability to adhere to the revised terms of the R150m Bank of China (“BoC”) working capital facility is fundamentally dependent on the sale of the EM business. To that end, GCR is concerned about material risk of further restructuring of the group’s debt should the transaction, as well as other cash generation initiatives, take longer to finalise than expected. The reliance on a single counterparty for the group’s facilities, as well as the vulnerability of covenants to earnings volatility also inherently curtails the group’s financial flexibility, albeit demonstrated funding support from the BoC is noted.
Constrained volumes in a weak domestic operating climate have constrained earnings, resulting in volatile gearing metrics. Specifically, the group fell just short of a 3.5x debt to EBITDA at FY19, with future migration in the ratio remaining susceptible to variability in earnings and depending on the success of planned deleveraging. Interest coverage also fell below the bond covenant threshold of 2.0x, and will only substantively strengthen from 3Q FY20, as debt is reduced. Cash flow coverage of debt has historically been volatile, reflecting variable cash generation and a high ongoing capex requirement. Looking ahead, Jasco continues to consider options to raise capital, which will be required to stabilise the financial profile and fund further growth.
Regarding management and governance, GCR takes a negative view of certain unsuccessful ventures and international expansion initiatives, which have underpinned substantial losses in the past five years. Jasco’s complex structure has also historically contributed to high overheads. Positively, the unsuccessful international operations have been terminated, with no further losses expected in this regard.
The earnings profile and competitive position are viewed as negative rating factors, with GCR noting Jasco’s low scale in broad, highly competitive and fragmented industry. While cognisance has been taken of Jasco’s integrated offering and product innovation, sizeable impairments, coupled with high overheads have eroded earnings and capital. Contributing to the high cost base is an onerous rental lease and administrative expenses related to non-operating entities. GCR has noted cost containment efforts and growth initiatives that are being pursued, which could shore up a stronger baseline margin. Nevertheless, sustainable earnings levels are dependent on higher volumes and further entrenchment of Jasco’s ICT offering.
A further downgrade could materialise if a default or debt restructure scenario is announced or is expected in the short term. This could result from delays in planned disposals whose proceeds are required to reduce debt, and/or if the group fails to demonstrate meaningful progress towards a capital raise. Conversely, the ratings could improve on the back of substantive deleveraging, coupled with a stabilisation in earnings and cash generation that supports a sustainable improvement in liquidity.
|Primary analyst||Patricia Zvarayi||Deputy Sector Head: Corporates|
|Johannesburg, ZA||Patricia@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Alan Mananga||Associate Analyst: Corporates|
|Johannesburg, ZA||Alanm@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie <email@example.com>||Sector Head: Financial Institutions|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Corporate Companies, May 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, June 2019|
|GCR Corporate Sector Risk Scores, updated December 2019|
Jasco Electronics Holdings Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Issuer Long Term||Initial||National||BB-(ZA)||Stable||Feb 2013|
|Issuer Short Term||National||B(ZA)|
|Issuer Long Term||Last||National||BB-(ZA)||Stable||Nov 2018|
|Issuer Short Term||National||B(ZA)|
RISK SCORE SUMMARY
|Country Risk Score||7.50|
|Sector Risk Score||5.50|
|Management and Governance||-0.50|
|Leverage & Capital Structure||-2.00|
|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.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Default||A default occurs when: 1.) The Borrower is unable to repay its debt obligations in full; 2.) A credit-loss event such as charge-off, specific provision or distressed restructuring involving the forgiveness or postponement of obligations; 3.) The borrower is past due more than X days on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors.|
|Downgrade||The rating has been lowered on its specific scale.|
|Issuer Ratings||See GCR Rating Scales, Symbols and Definitions.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidation||Liquidation is the process by which a company is wound up and its assets distributed. It can be either compulsory or voluntary. It can also refer to the selling of securities or the closing out of a long or short market position.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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||See GCR Rating Scales, Symbols and Definitions.|
|Property||Movable or immovable asset.|
|Rating Watch||See GCR Rating Scales, Symbols and Definitions.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
SALIENT POINTS 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 were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were 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.
The credit rating has been disclosed to Jasco Electronics Holdings Limited. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Jasco Electronics Holdings 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 information received from Jasco Electronics Holdings Limited and other reliable third parties to accord the credit rating included:
- Audited results for year ended 30 June 2019 and four years’ audited financials;
- Results presentations and SENS announcements;
- Detailed debt schedules and related facility information at 30 June 2019.