Johannesburg, 30 November 2016 – Global Credit Ratings has downgraded the national scale ratings of National Housing Finance Corporation Soc Limited to A+(ZA) and A1(ZA) in the long-term and short-term respectively; with the outlook accorded as Negative. Furthermore, Global Credit Ratings has downgraded the international scale long-term local currency rating of National Housing Finance Corporation Soc Limited to BB+; with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to National Housing Finance Corporation Soc Limited (“NHFC”, “the Company”) based on the following key criteria:
The ratings of NHFC are underpinned by the strong support available from its parent, the South African Government (“Government”, “the State”) and its key position as a development finance institution (“DFI”), providing affordable housing finance opportunities to the gap market (households who earn between R3,500 and R15,000 per month). The ratings also reflect that despite achieving the bulk of its developmental objectives, key financial performance measures (being loan book growth, asset quality and profitability) weakened further in F16 and 1H F17, in challenging market conditions. Furthermore, certain financial covenants relating to loan facilities with funders remain under pressure.
The State’s three housing DFIs — NHFC, Rural Housing Loan Fund (“RHLF”), and National Urban Reconstruction and Housing Agency (“NURCHA”) are in the process of being consolidated into a single institution, which is likely to result in NHFC, as the identified institution, absorbing RHLF and NURCHA. Nonetheless, the ratings do not reflect the effects of the merger (expected to result in a tax exemption for NHFC, enhance the combined entity’s capital base and ability to provide affordable housing, among other synergies), which is yet to be finalised.
Thusfar, NHFC has received R430m of the R610m grant capital that has been allocated to it for the Medium Term Strategic Framework (“MTSF”) period (2015-2019) by the shareholder. After receiving R230m in the first recapitalisation phase in F15, the shareholder and National Treasury approved a further R300m to be paid in three annual tranches of R100m, and R80m in the final year (F19). The first two tranches of R100m were received in F16 and 1H F17. Consequently, solvency indicators have remained strong, with the Company recording a total capital to assets ratio of 89.2% at 1H F17 (FYE16: 87.8%; FYE15: 81.4%), while gross gearing remained extremely low at 0.1x.
Continuing the F15 trend, asset quality deteriorated further during the period under review due to challenging economic and market conditions which affected mainly three of NHFC’s big clients. At FYE16, the Company recorded a gross impairment ratio of 20.8% (FYE15: 21.9%), after writing off 5.2% of its average gross loan book. During 1H F17, the Company experienced additional impairments, registering a gross impairment ratio of 24%.
Notwithstanding an improved cost structure in F16, NHFC reported its first loss since inception of R54.9m (F15: R4.6m profit), largely due to a 2.9x rise in impairment charges, and a decline in interest income owing to reduced lending and collections as some revenue was locked up in non-performing loans. Although below the previous corresponding period’s earnings, the Company posted a pre-tax profit of R41.5m in 1H F17. However, over the medium term, incremental provisions remain the key risk to NHFC’s profitability, as continued loan downgrades into lower categories (that require higher provisioning) cannot be fully discounted.
The outlook for the short to medium term remains challenging, and indications are that particular financial covenants relating to NHFC’s borrowings will continue to be under threat, in particular the overall quality of the loan book, and profitability. NHFC is, however, engaging with its funders, who have indicated their commitment as strategic partners of the Company.
The ‘Negative’ rating outlook combined with the Company’s challenging operating environment limits the likelihood of upgrades over the medium term. NHFC’s ratings will be sensitive to a lack of improvement in asset quality and earnings, the potential inability to gain access to sufficient funding and/or covenant breaches.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE RATING HISTORY|
|Initial rating (February 2004)||Initial rating (November 2013)|
|Long term: AA-(ZA); Short term: A1+(ZA)||Long term: BBB|
|Outlook: Stable||Outlook: Stable|
|Last rating (December 2015)||Last rating (December 2015)|
|Long term: AA-(ZA); Short term: A1+(ZA)||Long term: BBB-|
|Outlook: Negative||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Kuzivakwashe Murigo||Jennifer Mwerenga|
|Credit Analyst||Senior Credit Analyst|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions, updated March 2016
Global Criteria for Rating Finance and Leasing Companies, updated March 2016
NHFC rating reports (2004-15)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
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.
National Housing Finance Company Soc Limited participated in the rating process via 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 National Housing Finance Company Soc Limited with no contestation of the ratings.
The information received from National Housing Finance Company Soc Limited and other reliable third parties to accord the credit ratings included:
- Audited financial results of the group and to 31 March 2016 (plus four years of comparative numbers);
- Interim financial results of the group and to 30 September 2016;
- Latest internal and/or external audit reports to management;
- A breakdown of facilities available and related counterparties; and
- Corporate governance and enterprise risk framework.
The ratings above were solicited by, or on behalf of, National Housing Finance Company Soc Limited, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Asset||A resource with economic value that a company owns or controls with the expectation that it will provide future benefit.|
|Asset Quality||Refers primarily to the credit quality of a bank’s earning assets, the bulk of which comprises its loan portfolio, but will also include its investment portfolio as well as off balance sheet items. Quality in this context means the degree to which the loans that the bank has extended are performing (ie, being paid back in accordance with their terms) and the likelihood that they will continue to perform.|
|Capital||The sum of money that is invested to generate proceeds.|
|Capital Base||The issued capital of a company, plus reserves and retained profits.|
|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 company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Financial Institution||An entity that focuses on dealing with financial transactions, such as investments, loans and deposits.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt.|
|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||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Long-Term||Not current; ordinarily more than one year.|
|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.|
|National Scale Rating||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.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Provision||The amount set aside or deducted from operating income to cover expected or identified loan losses.|
|Rating Outlook||Indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Tranche||Used to mean an allocation or instalment of a larger loan facility. Tranches of the same debt programme may differ from each other because they pay different interest rates, mature on different dates, carry different levels of risk, or differ in some other way.|
For a detailed glossary of terms utilised in this announcement please click here
GCR downgrades National Housing Finance Corporation Soc Limited’s rating to A+(ZA); Outlook Negative.