Johannesburg, 18 December 2019 – GCR Ratings (“GCR”) has downgraded the long-term National Scale Issuer rating accorded to FTG Holdings Limited to BB-(KE) from BB+(KE), and affirmed the short-term National Scale Issuer rating at B(KE); with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|FTG Holdings Limited||Issuer Long Term||National||BB-(KE)||Stable Outlook|
|Issuer Short Term||National||B(KE)|
On May 22, 2019 GCR announced that it had released a new rating framework and sectoral criteria. As a result, the ratings were placed “Under Criteria Observation”. Subsequently, GCR has finalised the FTG Holdings Limited (“FTGH”) rating review under the new Criteria for Rating Corporate Entities. As a result, the ratings have been removed from ‘Under Criteria Observation’ and the rating reviewed in line with the new methodology.
The rating action reflects the deterioration in FTGH’s earnings performance and cash flow generation, which has resulted in some pressure on credit protection metrics.
FTGH’s ratings are constrained by sustained weak earnings and cash flow generation, due to a combination of operational challenges in some key territories and higher costs of imported raw materials. This saw the EBITDA margin decline to 7.2% in FY18 (FY17: 9.6%). Thus, while total debt has remained modest and largely stable, credit protection metrics have gradually weakened, with net debt to EBITDA increasing to 2.3x at FY18 (FY17: 1.5x) and EBITDA coverage of interest falling to 3x (FY17: 5x). Of particular concern is the operating cash flow coverage of debt, which declined to under 10% in FY18. Nevertheless, note is taken of additional production capacity from new plants, new distribution outlets and sizeable contracts in key territories, which are expected to support a recovery in earnings from FY20. In addition, ongoing cost containment initiatives, and rigorous control of the working capital cycle, are also expected to result in strong operating cash generation. That said, GCR would expect to see this being sustained through the cycle. A material decrease in gearing is only expected over the medium to long term as the group’s additional production capacity translates into sustained improved earnings and cash flows.
The ratings are supported by FTGH’s sound liquidity position, underpinned by a committed unutilised facility secured from a local financial institution in 2H FY19. Thus, the group is expected to achieve liquidity coverage of at least 1x in respect of its 1-year requirements, on the back of small near-term debt maturities and a well-laddered debt maturity profile. GCR has also considered the established and stable funding relationships with domestic financial institutions in support of the group’s liquidity assessment.
The ratings take cognisance of FTGH’s strong niche position in its core plastic tanks business, supported by diversified interests in fast moving consumer goods across East Africa. Note is also taken of the end-customer diversification that results from the group’s broad range of products aimed at different customer segments. The group’s recognised supply chain advantages, underpinned by long-standing supplier relationships and an extensive network of dealers and distributors further entrench its sound competitive position.
The Stable Outlook reflects GCR’s expectations that the group’s earnings will improve gradually over the medium term from increased production capacity, which should result in a steady improvement in gearing.
Positive rating action could arise from a sustained improvement in earnings and cash generation in line with the group’s projections, resulting in an improvement cash flow coverage of debt to above 25% and EBITDA coverage of interest above 4.5x. Conversely further negative rating action could result in any earnings and cash flow underperformance relative to expectations resulting in weakening of credit protection metrics.
|Primary analyst||Tavonga Muchemedzi||Analyst: Corporate Ratings|
|Johannesburg, ZA||tavongam@GCRratings.com||+27 11 784 1771|
|Secondary analyst||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||shevel@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Sector Head: Financial Institutions|
|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 Scores, published June 2019|
|GCR’s Kenyan Corporate Sector Risk Scores, September 2019|
FTG Holdings Limited
|Rating class||Review||Rating scale||Rating||Outlook/Watch||Date|
|Issuer Long term||Initial||National||BB+(KE)||Stable Outlook||May 2017|
|Issuer Short Term||Initial||National||B(KE)|
|Issuer Long term||Last||National||BB+(KE)||Stable Outlook||May 2018|
|Issuer Short Term||Last||National||B(KE)|
Risk Score Summary
|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.|
|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.|
|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.|
|Downgrade||The rating has been lowered on its specific scale.|
|Facility||The grant of availability of money at some future date in return for a fee.|
|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, EBITDA or operating income.|
|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 operating profit 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.|
|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.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Rating Horizon||The rating outlook period.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|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.|
|Upgrade||The rating has been raised on its specific scale.|
Salient Points 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 FTG 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.
FTG 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 FTG Holdings Limited and other reliable third parties to accord the credit ratings included:
- The 2018 audited annual financial statements (plus four years of audited comparative numbers);
- management accounts for 1H FY19,
- a breakdown of debt facilities available and related counterparties at 30 November 2019,
- and projections for FY19 and FY20.