Johannesburg, 30 April 2019 — GCR Ratings (“GCR”) has downgraded the national scale Issuer ratings assigned to Nampak Limited to A-(ZA) and A1-(ZA) for the long and short term respectively. A stable rating outlook has been accorded to the rating.
Concurrently, Global Credit Ratings has also downgraded the national scale Issuer ratings assigned to Nampak Products Limited to A-(ZA) and A1-(ZA) for the long and short term respectively; with a stable outlook accorded.
The ratings for both Nampak Limited and Nampak Products Limited have been withdrawn for business reasons, due to the fact that the Nampak Group no longer has any listed funding instruments.
SUMMARY RATING RATIONALE
GCR has accorded the above credit ratings to Nampak Limited (“Nampak” or “the group”) and Nampak Products Limited based on the rationale summarised below:
The downgrade is premised on the sustained pressure on revenue in the wake of challenging operating environments in key territories. Total volumes are expected to remain constrained in FY19, on the back of sluggish economic growth and increased competition in South Africa, coupled with foreign currency liquidity challenges in certain markets. That said, note is taken of enhanced cost controls and procurement efficiencies which helped to anchor the trading profit margin.
While the planned disposal of the Glass business is intended to optimise the portfolio and bring further focus to profitable operations, GCR is of the view that the loss of product line diversification and volumes somewhat curtails the group’s competitive position.
The downgrade further reflects the sustained high levels of debt, especially when assessed in respect of the weak operating cash flow coverage group financial liabilities. This has seen stressed key credit protection metrics deteriorate at FY18, contrasting the expected improvement.
This notwithstanding, in September FY18 the group secured R12.5bn in committed revolving and term banking facilities, which materially enhanced liquidity and alleviated refinancing risk, with particular note taken of the portion set aside specifically to redeem the maturing notes in FY20. Long-standing relationships with strongly rated domestic financial institutions have also been considered.
Although foreign currency liquidity has significantly improved in Nigeria and Angola, as evidenced by the R3.6bn in cash extracted from the two countries during FY18, cash extraction challenges persist in Zimbabwe. Nampak continues to take measures to protect cash holdings in affected countries, but the group remains susceptible to unforeseen territorial risks.
With respect to Nampak Products Limited, GCR has considered the explicit, unconditional and irrevocable cross guarantees provided by Nampak in favour of banks and other counterparties, which enable the subsidiary’s debt to rank pari passu with other Nampak obligations. This in addition to the strategic importance of Nampak Products to the group supports the equalisation of Nampak Products Issuer ratings to those of its parent.
A ratings upgrade would likely only be considered in the medium-long term, based on a progressive reduction in debt and sustained improvement in operating performance. Conversely, a further increase in debt will exert pressure on credit protection metrics and could warrant negative rating action. Persistent/renewed currency extraction challenges in key territories would also be negatively viewed.
NATIONAL SCALE RATINGS HISTORY
Initial rating (March 2001)
Long term: AA-(ZA)
Short term: A1+(ZA)
Last rating (March 2018)
Long term: A(ZA)
Short term: A1(ZA)
Nampak Products Limited
Initial rating (July 2004)
Long term: n.a
Short term: A1+(ZA)
Last rating (May 2018)
Long term: A(ZA)
Short term: A1(ZA)
Analyst: Corporate Ratings
Sector Head: Corporate Ratings
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, updated February 2018
Nampak Limited rating reports (2001-18)
Nampak Products Limited rating reports (2004-18)
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.|
|Currency Risk||The potential for losses arising from adverse movements in exchange rates.|
|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.|
|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.|
|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.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|Operating Profit||Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.|
|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.|
|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.|
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.
Nampak Limited participated in the rating process via written feedback. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to Nampak Limited.
The information received from Nampak Limited and other reliable third parties to accord the credit rating(s) included;
- audited financial results and the Integrated Report per 30 September 2018;
- four years audited financial statements and Integrated Reports for 2014-2017;
- investor presentations;
- pre-closed period conference call dated 27 March 2019; and
- applicable SENS announcements.
The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.