Global Credit Ratings has accorded the above credit rating(s) on KenolKobil Limited based on the following key criteria:
The rating takes cognisance of KenolKobil’s position as a leading regional oil marketer, underpinned by dominant positions in middle to downstream oil importation and trading. However, following exceptional F11 performance, the group registered a contraction in revenue and substantial losses in F12, which consumed nearly half of shareholders interest. The performance downturn was driven by a range of factors, including declining oil prices, as well as reduced export and aviation demand. Note is also taken of rising competitive pressures, oil price and currency volatility, infrastructural challenges, and increased regulatory scrutiny, factors which have contributed to subdued performance across the domestic oil marketing sector. Critically, exchange rate volatility has resulted in large losses of KShs5.8bn over 2 years, a sizeable portion of which related to foreign currency hedges. The group’s foreign exchange exposure is a function of its large import requirement, which in recent years has been ramped up by the markedly higher volumes, deriving from aggressive expansion, active participation on the open tender system (“OTS”) and high export trading volumes.
Looking ahead, an operational overhaul, which includes improved marketing, enhanced inventory management and cost rationalisation, should support a return to sustainable profitability. In this regard, a deliberate effort to unwind high-cost inventories led to a large release in F12. While this was supportive of operating cash flows, a rebound in volumes and price recovery is likely to result in absorptions in the medium term, despite stricter cash management. Debt levels have risen substantially over the years to fund the high business volumes. Coupled with the recent capital erosion, this has constrained the group’s financial flexibility, resulting in persistently high gearing metrics. Debt serviceability measures have also deteriorated, a factor exacerbated by the largely short dated nature of debt, and resultant sensitivity to interest rate movements.
Upward rating pressure would derive from consistently robust cash flows, underpinned by a return to strong profitability over the medium term. Capital support would also be viewed positively, as it will alleviate funding pressure. In this regard, the recent termination of a sales agreement orginally signed with Puma Energy International Plc in May 2012, which was expected to ultimately result in the multinational acquiring KenolKobil’s entire shareholding, bodes negatively, given the anticipated benefits in terms of capital and technical support it would have provided. In GCR’s view, the maintenance of substantial trading volumes without further funding support or improved exchange risk mitigants will drive further losses. Given the highly geared balance sheet, continued oil price deflation would also place downward pressure on the rating.
NATIONAL SCALE RATINGS HISTORY
Initial rating (Dec/2004)
Long term: AA-(KE); Short term: A1+(KE)
Last rating (Jul/2012)
Long term: A+(KE); Short term: A1(KE)
+27 11 784 1771
Sector Head: Corporates
+27 11 784 1771
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GCR’s Criteria for Rating Corporate Entities
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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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 be ingrated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
KenolKobil Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of info received was considered adequate and has been independently verified where possible.
The credit rating/s has been disclosed to KenolKobil Limited with no contestation of the rating.
The information received from KenolKobil Limited and other reliable third parties to accord the credit rating included the latest audited annual financial statements (plus four years of comparative numbers), latest internal and/or external report to management, full year detailed budgeted financial statements, most recent year to date management accounts, corporate governance and enterprise risk framework, reserving methodologies, capital management policy, Industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.