Johannesburg, 10 July 2020 – GCR Ratings (‘GCR’) has downgraded Retail Capital Proprietary Limited’s international scale long-term issuer rating to B- from B, with a Stable Outlook. At the same time, GCR has affirmed Retail Capital Proprietary Limited’s South African long and short-term issuer ratings of BB+(ZA)/B(ZA), with the outlook accorded as Stable.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Retail Capital Proprietary Limited||Long Term issuer||National||BB+(ZA)||Stable Outlook|
|Short Term issuer||National||B(ZA)|
|Long Term issuer||International||B-||Stable Outlook|
The downgrade of Retail Capital Limited’s (‘Retail Capital’, ‘the company’) international scale rating reflects the strained operating environment of South Africa and increasing risk in the banking sector post COVID-19. The national scale ratings have been affirmed however, based on adequate balance sheet metrics, seen by strong capitalisation, adequate funding and liquidity, but moderated for high cost of risk and business concentration.
Retail Capital is primarily a cash flow financier of SMEs lacking access to traditional finance from commercial banks. In addition, the company has an asset backed lending business that specializes in equipment leasing to SMEs. We view this concentration to SMEs and the limited product line to be a relative weakness to the rating, in comparison to the large and diverse regulated banks. The COVID-19 crisis has proved the downside risks of this concentration, as we have seen most SMEs in sectors which Retail Capital is largely exposed to, facing restrained operations leading to temporary business closures. Positively, the asset finance business which has continued to perform well even during this pandemic provides the necessary product and sectoral diversification. The business profile is stabled by a good track record of revenues, although the nationwide restrictions has had some negative retracements to the growth achieved over the past few years.
Positively, capitalisation (measured from a financial leverage perspective) is strong, as shown by a GCR leverage ratio of c.26% as of March 31st 2020. Good earnings are also supportive of a strong leverage, although over the next 12 months profitability will largely depend on how SMEs recover from the COVID crisis. The company has continued to return between 6%-7% on its assets over the past 5 years and forward looking returns are expected to trend within these observed ranges, outside fresh shocks. On the downside, the length of the current pandemic could erode Retail Capital’s balance sheet as credit losses mount. With that said, the company expects to write off c.8% of its loan book (levels consistent through the cycle) and the GCR leverage ratio will likely lower to around 20% as a result. Quicker than anticipated resumption of trading activities by most of Retail Capital’s customers, coupled with shareholders who are ready to inject capital to cover capital shortfall from write offs and limited loan growth, lessens the downside risk of a weaker leverage ratio over the next 2 years.
Cost of risk of 6% as of March 2020 is high compared rated peers. The merchant cash advance book (which comprises 70% of total exposures) is significantly exposed to sectors hardest hit by COVID-19 and GCR anticipates a spike in the cost of risk over the next 12-18 months consistent with sector wide expectations. Positively, collections have improved with between 80-90% of customers having resumed trading, and coupled with the asset finance book that is secured and performing well albeit collecting 15% lower than normal due to debt relief granted, the cost of risk is not expected to materially deteriorate from current levels. Concentrations are low with the top 20 advances accounting for 17% of total advances and the single largest exposure accounts for 3.5% of total loans.
Funding structure is stable, given the term profile of debt, although the existence of covenants introduces some risk. Concentrations are high, with structure consisting of only five term funders and one liquidity funder, however we do consider the relatively low funding needs given the size of the institution. Liquidity on the other hand is good, managed on a positive asset/liability mismatch. The company targets weighted average funding repayments/weighted average receipts ratio of at least 1.3x and as of March 2020 it was at 2x. This reflects the very short term nature of the loan book versus a fairly longer term profile of debt. In addition, there are no significant debt maturities expected over the next 12 months and covenants are being complied with reflected by good headroom.
The Stable outlook factors in our expectation of a strong leverage, supported by good earnings and shareholder injections. We anticipate the cost of risk to spike to the 8-9% range, but we believe the entity holds adequate capital for that level of risk. Funding and liquidity is expected to remain stable, but will be monitored as the current situation evolves.
There is limited upside to the ratings given the uncertain operating environment. However, a national scale ratings improvement could arise from sustained improvement in the cost of risk. A national scale downgrade could be caused by higher than anticipated credit losses, weaker leverage ratio in the absence of the expected shareholder injections and poor earnings should operating environment remain weak.
|Primary analyst||Simbarake Chimutanda||Financial Institutions Analyst|
|Johannesburg, ZA||SimbarakeC@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of 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 Financial Institutions, May 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, May 2020|
|GCR Financial Institutions Sector Risk Score, June 2020|
Retail Capital Proprietary limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term issuer||Initial||National||BB(ZA)||Stable||April 2017|
|Short Term issuer||Initial||National||B(ZA)||N/A||April 2017|
|Long Term issuer||Initial||International||B||Stable||April 2017|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||7.00|
|Sector risk score||5.00|
|Management and governance||0.0|
|Capital and Leverage||4.00|
|Funding and Liquidity||0.00|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|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.|
|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.|
Salient Points of Accorded Ratings
GCR affirms that a.) no part of the ratings were 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 rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The credit rating has been disclosed to Retail Capital Proprietary 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 rating.
Retail Capital Proprietary Limited participated in the rating process via face-to-face management meetings, and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Retail Capital Proprietary Limited and other reliable third parties to accord the credit rating included:
- Unaudited management accounts of Retail Capital Proprietary Limited as at 31 March 2020;
- Latest internal and/or external audit report to management;
- Industry comparative data.