Lagos, Nigeria, 30 September 2021 – GCR Ratings (“GCR”) places Wema Funding SPV Plc’s Series 1 and 2 Fixed Rate unsubordinated Bonds of BBB-(NG) on Negative Watch.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|N6.295bn Series 1 Unsubordinated Bonds||Long Term Issue||National||BBB-(NG)||Negative Watch|
|N17.675bn Series 2 Unsubordinated Bonds||Long Term Issue||National||BBB-(NG)||Negative Watch|
The negative watch reflects the risk that Wema Bank Plc (“the Sponsor”) may fail to increase its core capital in the next 6 months, which will mean that we need to affirm the Sponsor’s issuer credit rating and lower the issue ratings to reflect the structural subordination of the Series 1 and Series 2 bonds (“the Bonds”). The anticipated increase in tier one capital through a rights Issue before the end of 2021 is expected to see the GCR capital ratio for the Sponsor improve to around 25-30% within the next 6 months. All things being equal, this should lead to a rating improvement on the Sponsor.
The Bonds were issued under Wema Funding SPV Plc’s (“Wema Funding” or “the Issuer”) N50bn Debt Issuance Programme (“DIP”). The enabling resolution of the Issuer’s Board of Directors permits the directors to issue the Bonds in tranches, different forms, and under different terms and conditions as it may deem fit, subject to the approval of the relevant regulatory authorities. The Bonds constitutes direct, unsecured, and unsubordinated obligations of the Issuer and rank pari passu without any preference among themselves, and with every other unsubordinated obligation of the Issuer.
While the Issuer is Wema Funding SPV Plc, repayment of the obligations under the Issues ultimately depends on the performance of the Sponsor, as the direct obligor of the Issues. As such, the accorded rating is linked to Wema’s credit standing and financial position and is a notch lower, given the Subordinated status of the Wema Bonds issued by the Sponsor to the Issuer. Wema has been accorded a long-term national scale credit rating of BBB-(NG) with a Positive Rating Watch by GCR.
The transaction mechanics entails the use of the proceeds of the issuance of Wema Funding Series 1 and Series 2 Bonds to purchase (up to 55% of the proceeds) subordinated bonds issued by the Sponsor. The remaining portion of the proceeds of the Issue (45%) are held in the Debt Service Payment Account (“DSPA”)and invested in Federal Government of Nigeria Securities. All Subordinated Bonds’ debt servicing payments received from the Issue date are to be held in the DSPA and used to pay the coupon on the Bonds.
These Bonds are backed by an irrevocable and unconditional undertaking under the Deed of Undertaking between the Sponsor and the Issuer.
According to the periodic performance reports provided to GCR by the Trustees to the Bondholders, as at August 2021, the Issuer has been meeting all its obligations under the Bond issues on a timely basis on both the Series 1 and 2 Bonds.
The Negative Watch Outlook reflects the likelihood of the ratings being lowered a notch over the next six months should the Sponsor not conclude/raise the planned capital. Should the capital raise materialise, we anticipate an improvement in capitalisation, which would likely result to an uplift of the Sponsor’s rating and affirmation of the Issues rating.
Given that the ability of the Issuer to meet its obligations under this Issue is dependent on the financial condition of the Sponsor, the accorded rating would be sensitive to a positive rating action on the Sponsor. Non-compliance with the set covenants, as well as a downgrade of the Sponsor’s rating could trigger negative rating actions.
|Primary analyst||Adeyinka Olowofela||Senior Analyst, Financial Institutions|
|Lagos, Nigeria||yinka@GCRratings.com||+234 1 9049462|
|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 Nigeria Country Risk Scores, February 2021|
Wema Funding SPV Plc- Series 1 and 2 Fixed Rate Subordinated Bonds
|Rated Entity||Review||Rating scale||Rating||Outlook||Date|
|Series 1 Bonds||Initial||National||BBB-(NG)||Stable||December 2016|
|Series 2 Bonds||Initial||National||BBB-(NG)||Stable||December 2018|
|Series 1 & 2 Bonds||Last||National||BBB-(NG)||Stable||August 2020|
|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.|
|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.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|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.|
|Rating Outlook||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.|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process 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 credit rating has been disclosed to Wema Bank Plc. The rating above was solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the rating.
Wema Bank Plc participated in the rating process via tele-conferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Wema Bank Plc and other reliable third parties to accord the credit rating included:
- The audited financial results of the Issuer and Sponsor as at 31 December 2020
- Four years of comparative audited numbers
- Trustees’ performance reports up to August 2021
- Other related documents.