Johannesburg, 15 February 2017 — Global Credit Ratings (“GCR”) has downgraded the national scale ratings assigned to The Company for Habitat and Housing in Africa (“Shelter Afrique”, “the company”) to A+(KE) and A1(KE) in the long term and short term respectively; with the outlook accorded as Negative. Furthermore, GCR has downgraded the international scale foreign currency (“FC”) rating assigned to Shelter Afrique to BB-; with the outlook accorded as Negative. The ratings are valid until September 2017.
The ratings downgrades reflect evidence of a materially weaker asset quality position and non-optimal risk management and corporate governance policies at the company, following findings of a forensic investigation by Deloitte published in its Factual Findings Report (“the report”)1. The negative rating outlooks reflect uncertainty regarding (i) the timely payment of additional committed capital by shareholders; (ii) Shelter Afrique’s ability to access additional debt funding; and (iii) the company’s future financial position, performance and prospects.
GCR has accorded the above credit ratings to Shelter Afrique based on the following key criteria:
The recently concluded forensic investigation at Shelter Afrique cited multiple restructuring of non-performing loans (“NPLs”), which misrepresented the quality of the company’s loan portfolio. The report exposed weaknesses in Shelter Afrique’s Loan Administration Policy, which enabled multiple loan restructurings. The report also highlighted instances of misappropriation of funds and wrongful termination by the former managing director.
Based on the report’s findings and conclusions, Shelter Afrique’s credit risk is significantly higher than GCR’s historical assessments/assumptions. The company’s level of restructured loans was 22.3% of the loan book balance at 30 June 2016, compared to 13.4% at 31 December 2015. Furthermore, NPLs (including restructured loans) constituted 32.1% of gross loans at 30 June 2016 (31 December 2015: 22.6%). Deloitte estimated that c.USD6.4m of loans was at risk, which is likely to lead to higher provisions, and exert pressure on the company’s profitability and capital levels in 2017.
The report exposed weaknesses associated with the company’s internal controls, risk management policies, board and senior /executive management oversight, as well as non-compliance with industry best practice, and the company’s own procedure and policy requirements. According to management, the company has begun implementing some of the report’s recommendations for developing more robust, effective and representative risk management and corporate governance frameworks. Moreover, Shelter Afrique has appointed a new interim managing director and chief financial officer.
In the past few months, the company has experienced funding/liquidity challenges as a result of the allegations and resultant uncertainties. The potential for further funding and cash flow volatility cannot be discounted given the possible reputational damage incurred. While the company’s shareholders committed to honour their arrears capital subscriptions at an extraordinary shareholders meeting held in January 2017, GCR recognises that the company has had limited success in securing already committed capital from its shareholders in recent years. Shareholders approved a USD146m capital raise in 2013 (payable over five years), of which approximately USD90m is still outstanding. According to management, shareholders have committed to provide capital support of up to USD116m by 31 December 2017.
The negative rating outlooks make a ratings upgrade unlikely in the near term. The ratings could stabilise at the current level should the company’s funding and liquidity position stabilise on the back of new capital injections and continued debt funding support. Shelter Afrique’s ratings could be further downgraded if the company (i) fails to raise adequate capital; (ii) is unable to gain access to sufficient market funding; (iii) fails to implement the report’s risk management and corporate governance recommendations; or (iv) financial and credit metrics are below GCR’s expectations.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE FC RATING HISTORY|
|Initial rating (July 2005)||Initial rating (July 2005)|
|Long term: AA(KE); Short term: A1+(KE)||Long term: BBB-|
|Outlook: Stable||Outlook: Stable|
|Last rating (September 2016)||Last rating (September 2016)|
|Long term: AA(KE); Short term: A1+(KE)||Long term: BB|
|Outlook: Stable||Outlook: Stable|
|Primary Analyst||Committee Chairperson|
|Kurt Boere||Omega Collocott|
|Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2016)
Global Criteria for Rating Multilateral Development Banks (September 2016)
Deloitte’s Factual Findings Report – Shelter Afrique (December 2016)
Shelter Afrique rating reports (2005-16)
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; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The Company for Habitat and Housing in Africa 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 The Company for Habitat and Housing in Africa with no contestation of the rating.
- Audited financial results of the group as at 31 December 2015 (plus four years of comparative figures)
- Unaudited interim results of the group as at 30 June 2016 and 30 November 2016.
- Latest internal and/or external audit report to management
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, The Company for Habitat and Housing in Africa, 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
|Arrears||An overdue debt, liability or obligation. An account is said to be ‘in arrears’ if one or more payments have been missed in transactions where regular payments are contractually required.|
|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.|
|Audit Report||A written opinion of an auditor (attesting to the financial statements’ fairness and compliance with generally accepted accounting principles).|
|Basel||Basel Committee on Banking Supervision housed at the Bank for International Settlements.|
|Callable||A provision that allows an Issuer to repurchase a security before its maturity.|
|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.|
|Corporate Governance||Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Credit Rating Agency||An entity that provides credit rating services.|
|Credit Risk||The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and/or interest when due.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Equity||Equity (or shareholders’ funds) is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|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.|
|Income Statement||A summary of all the expenditure and income of a company over a set period.|
|International Scale FC Rating||International foreign currency (International FC) ratings measure the ability of an organisation to service foreign currency obligations, taking into account transfer and convertibility risks.|
|Liquid Assets||Assets, generally of a short term, that can be converted into cash.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|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.|
|Maturity||The length of time between the issue of a bond or other security and the date on which it becomes payable in full.|
|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.|
|Principal||The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.|
|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.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Risk Management Process||The systematic application of management policies, procedures and practices to the tasks of risk identification, assessment and measurement, response and action, monitoring and review, and risk reporting.|
|Settlement||Full repayment of an obligation.|
|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.|
For a detailed glossary of terms utilised in this announcement please click here
GCR downgrades Shelter Afrique’s rating to A+(KE); Outlook Negative.