Johannesburg, 18 July 2019 – GCR Ratings (“GCR”) has downgraded Omnia Holdings Limited (“Omnia”) and Omnia Group Investments Limited’s national scale Issuer ratings to BBB-(ZA) andA3(ZA) in the long term and short term respectively, from A-(ZA) and A1-(ZA) respectively. The ratings remain on Rating Watch Negative.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Omnia Holdings Limited||Issuer Long Term||National||BBB-(ZA)||Rating Watch Negative|
|Issuer Short Term||National||A3(ZA)|
|Omnia Group Investments Limited||Issuer Long Term||National||BBB-(ZA)||Rating Watch Negative|
|Issuer Short Term||National||A3(ZA)|
The rating action reflects the deterioration in Omnia’s credit risk metrics, as assessed under GCR’s recently released Criteria for Rating Corporate Entities, counterbalanced by the expected improvement in the group’s capital structure, earnings and debt profile post an anticipated rights issue scheduled for 2Q FY20.
Omnia reported gearing well above guidance, while negative discretionary cash flows have persisted, due to weakened profitability and working capital pressure coinciding with an aggressive investment strategy. While acquisitions were funded from internal cash resources and were earnings-enhancing, distortions in the cash conversion cycle due to drought, late rains, weaknesses along certain product lines and heightened territorial risks in Zimbabwe in particular, translated to substantially higher debt and gearing levels than expected. This could have triggered debt covenant levels had Omnia not proactively restructured its funding to the current bridge financing, which was the first step to achieving a more sustainable capital structure for the group.
Specifically, pre-emptive engagement before a covenant breach saw funders waive their rights to accelerated repayment. Furthermore, bridging facilities of R6.8bn allowed Omnia to replace pre-existing credit lines and secure interim liquidity (in the form of undrawn, committed general banking facilities). This comes ahead of the recapitalisation of the group through a fully underwritten R2bn rights issue, whose proceeds will be used to discharge debt. The rights issue is to be followed by the terming out of remaining legacy debt of c.R3.1bn, with Omnia intending to manage net debt to EBITDA between 2.0x-3.0x over the rating horizon, and down to less than 2.0x in the medium term. Successful finalisation of the rights issue and debt restructure will, in GCR’s opinion, reduce gearing from unsustainably high levels and also help to stabilise the liquidity profile.
GCR’s ratings reflect the following expectations:
- a successful rights issue alongside a material terming out of the debt maturity profile, and reasonable diversification of funding sources;
- a baseline EBITDA margin reset supported by savings from the nitrophos plant and rationalisation of the Chemicals and Mining divisions, although earnings remain susceptible to year-on-year variability due to end-market cyclicality and unforeseen territorial risks;
- gearing within the intermediate range, with net debt to EBITDA (adjusted for restricted cash as well as lease and capital commitments) migrating toward the lower end of the 2.0x-3.0x range, operating cash flow to debt of 30%-40%, and adjusted interest coverage of 3.0x-7.0x;
- improved liquidity supporting at least 1.0x coverage of requirements for 18-24 months post the change in the capital structure, minimum undrawn, committed facilities for liquidity around post-rights issue guidance, and adequate headroom on new covenants;
- capex capped at 3% of revenue, with no additional acquisitions until long term debt reduction targets are met.
GCR has also applied a positive peer adjustment, based on expected shareholder and creditor support, which will allow Omnia time to broadly improve its financial profile. The ratings will also continue to reflect the group’s mostly well-established market position in key territories, as well as product entrenchment supported by integration along the value chain. Omnia’s country risk score remains anchored by South Africa as its key territory, albeit this is counterbalanced by frontier market exposures.
The ratings remain on Rating Watch Negative, as failure to pass resolutions to issue new shares and pave way for issue of new capital would translate to an event of default in respect of the bridge facilities. Conversely, successful finalisation of the rights issue and the terming out of remaining debt would stabilise the ratings profile.
Further negative rating action would necessarily follow shareholders’ failure to pass the requisite resolutions to allow a rights offer and planned refinancing to progress in its current guise and/or cancellation/termination of the standby underwriting agreement. Failure to stabilise the earnings and discretionary cash flows could also result in further negative rating action. GCR considers the potential for rating uplift to be limited over the rating horizon.
|Primary analyst||Patricia Zvarayi||Deputy Sector head: Corporate Ratings|
|Johannesburg, ZA||Patricia@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Sector head: Financial Institution Ratings|
|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 Entities, May 2019|
|GCR’s Country Risk Score Report, June 2019|
|GCR’s South Africa Corporate Sector Risk Score Report, June 2019|
|Omnia Holdings Limited Credit Rating reports, 2009-18|
Omnia Holdings Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Issuer Long Term||Initial||National||BBB+(ZA)||Stable Outlook||Mar 2009|
|Last||National||A-(ZA)||Rating Watch Negative||May 2019|
|Issuer Short Term||Initial||National||A2(ZA)||–||Mar 2009|
Omnia Group Investments Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Issuer Long Term||Initial||National||A-(ZA)||Stable Outlook||Nov 2016|
|Last||National||A1-(ZA)||Rating Watch Negative||May 2019|
|Issuer Short Term||Initial||National||A1-(ZA)||–||Nov 2016|
RISK SCORE SUMMARY
|Country risk score||6.50|
|Sector risk score||4.00|
|Management and governance||0.00|
|Leverage and capital structure||-1.00|
|Country Risk||The range of risks emerging from the political, legal, economic and social conditions of a country that have adverse consequences affecting investors and creditors with exposure to the country, and may also include negative effects on financial institutions and borrowers in the country.|
|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.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.|
|Creditor||A credit provider that is owed debt obligations by a debtor.|
|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 a prescribed period on any debt obligations as defined in the transaction documents; 4.) The obligor has filed for bankruptcy or similar protection from creditors.|
|Discharge||Performance of obligations in a natural way according to a contractual relationship.|
|Discretionary cash flows||Cash flow from operating activities, less replacement and/or maintenance capital expenditure. GCR may use depreciation as a proxy of the minimum level of maintenance capital requirements.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|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. In insurance, it refers to an individual or company’s vulnerability to various risks|
|Proceeds||Funds from issuance of debt securities or sale of assets.|
|Rating Horizon||The rating outlook period|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Rating Watch||See GCR Rating Scales, Symbols and Definitions.|
|Refinancing||The issue of new debt to replace maturing debt. New debt may be provided by existing or new lenders, with a new set of terms in place.|
|Release||An agreement between the creditor and debtor, in terms of which the creditor release the debtor from its obligations.|
|Repayment||Payment made to honour obligations in regards to a credit agreement in the following credited order: 3.) Satisfy the due or unpaid interest charges; 4.) Satisfy the due or unpaid fees or charges; and 5.) To reduce the amount of the principal debt.|
|Rights Issue||One of the ways that a company can raise additional funds is to issue new shares. These must be first offered to current shareholders and a rights issue allows a shareholder to buy shares in proportion to the number already held.|
|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.|
|Working Capital||Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.|
|Gearing||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.|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s EBITDA by its interest payments for a given period.|
|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.|
|Issuer Ratings||See GCR Rating Scales, Symbols and Definitions.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Lease||Conveyance of land, buildings, equipment or other assets from one person (lessor) to another (lessee) for a specific period of time for monetary or other consideration, usually in the form of rent.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|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.|
|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.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the ratings 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 ratings have been disclosed to Omnia Holdings Limited. 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.
Omnia 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 Omnia Holdings Limited and other reliable third parties to accord the credit ratings included:
- the 2019 audited annual financial statements (plus four years of audited comparative numbers)
- presentations, SENS announcements and circulars
- details in respect of Omnia Holdings Limited’s bridge facilities and waiver agreements
- group budgets for FY2020/21