Announcements Corporate Rating Alerts

GCR downgrades Omnia’s rating to BBB-(ZA) to reflect its long-term view of leverage and cash flows post planned rights issue

Rating Action                                                

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)  

Rating Rationale

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: 

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.

Outlook Statement

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.

Rating Triggers

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.

Analytical contacts

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

Ratings history

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
  Last National A1-(ZA) May 2019
           

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
  Last National A1-(ZA) May 2019

RISK SCORE SUMMARY

Risk score 10.00
   
Operating environment 10.50
Country risk score 6.50
Sector risk score 4.00
   
Business profile 1.00
Competitive position 1.00
Management and governance 0.00
 
Financial profile -2.50
Earnings performance -1.50
Leverage and capital structure -1.00
Liquidity 0.00
   
Comparative profile 1.00
External support 0.00
Peer analysis 1.00

Glossary

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


ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

CREDIT RATINGS ISSUED AND RESEARCH PUBLICATIONS PUBLISHED BY GCR, ARE GCR’S OPINIONS, AS AT THE DATE OF ISSUE OR PUBLICATION THEREOF, OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. GCR DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: FRAUD, MARKET LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND GCR’S OPINIONS INCLUDED IN GCR’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. CREDIT RATINGS AND GCR’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND GCR’S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL OR HOLD PARTICULAR SECURITIES. NEITHER GCR’S CREDIT RATINGS, NOR ITS PUBLICATIONS, COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. GCR ISSUES ITS CREDIT RATINGS AND PUBLISHES GCR’S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING OR SALE.

Copyright 2019 GCR INFORMATION PUBLISHED BY GCR MAY NOT BE COPIED OR OTHERWISE REPRODUCED OR DISCLOSED, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT GCR’S PRIOR WRITTEN CONSENT. Credit ratings are solicited by, or on behalf of, the issuer of the instrument in respect of which the rating is issued, and GCR is compensated for the provision of these ratings. Information sources used to prepare the ratings are set out in each credit rating report and/or rating notification and include the following: parties involved in the ratings and public information. All information used to prepare the ratings is obtained by GCR from sources reasonably believed by it to be accurate and reliable. Although GCR will at all times use its best efforts and practices to ensure that the information it relies on is accurate at the time, GCR does not provide any warranty in respect of, nor is it otherwise responsible for, the accurateness of such information.GCR adopts all reasonable measures to ensure that the information it uses in assigning a credit rating is of sufficient quality and that such information is obtained from sources that GCR, acting reasonably, considers to be reliable, including, when appropriate, independent third-party sources. However, GCR cannot in every instance independently verify or validate information received in the rating process. Under no circumstances shall GCR have any liability to any person or entity for (a) any loss or damage suffered by such person or entity caused by, resulting from, or relating to, any error made by GCR, whether negligently (including gross negligence) or otherwise, or other circumstance or contingency outside the control of GCR or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits) suffered by such person or entity, as a result of the use of or inability to use any such information. The ratings, financial reporting analysis, projections, and other observations, if any, constituting part of the information contained in each credit rating report and/or rating notification are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. Each user of the information contained in each credit rating report and/or rating notification must make its own study and evaluation of each security it may consider purchasing, holding or selling. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY GCR IN ANY FORM OR MANNER WHATSOEVER.