Johannesburg, 10 July 2020 – GCR Ratings (‘GCR’) has downgraded Transaction Capital Limited’s long-term international scale rating to B, from B+, with a Stable outlook. At the same time, the South African long and short-term issuer ratings have been affirmed at A-(ZA)/A2(ZA), and outlook is Negative.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Transaction Capital Limited||Issuer Long Term||National||A-(ZA)||Negative Outlook|
|Issuer Short Term||National||A2(ZA)|
|Issuer Long Term||International||B||Stable Outlook|
The downgrade of Transaction Capital Limited’s (‘the group’) international scale rating reflects the strained operating environment of South Africa (‘SA’) and increasing banking sector risk post COVID-19. The national scale ratings on the group primarily reflect the strengths and weakness of its two major subsidiaries, SA Taxi Holdings (‘SA Taxi’) and Transaction Capital Risk Services (‘TCRS’). Further rating support is derived from the NOHCs (non-operating holding company) ungeared and highly liquid balance sheet, the absence of regulatory structural subordination, and the diversification benefits from different business lines of subsidiaries.
The competitive position of SA Taxi and TCRS balances their small but defendable niche positions, and strong track record of revenue stability. SA Taxi, with 100% of its operations in SA, is a strong niche with a developmental focus on the country’s taxi industry. We consider its market position to be defendable, and revenues are stable and modestly diversified. TCRS, a buyer of NPL books, has a leading domestic market position, although its operations in Australia are relatively small but growing. TCRS’ pricing advantages and strong collections infrastructure supports revenue stability.
SA Taxi’s financial profile is moderately strong, balancing strong capitalisation, high cost of risk, and moderate funding and liquidity risks. Capitalisation is strong, measured by the GCR total capital ratio of 18% as of 31 March 2020. We expect the ratio to range between 16-18% over the next 2 years, supported by good earnings and moderate loan growth. The financial profile is moderated for higher than sector average credit losses of 6.1% (COVID adjusted), although through the cycle they have ranged 3-4%. GCR expects credit losses to improve to around 5.8% by end of FY20, supported by improved collections from reopening of the economy. Funding is broadly diversified for a non-bank institution, consisting of international and local DFIs, on-balance sheet structures, warehousing facilities, and structured finance and securitisation vehicles. Additional liquidity support is derived from excess capital and unutilised bank facilities from the NOHC totalling R800mln.
TCRS’ financial profile balances the modest levels of leverage at year end 2019, with net debt to EBIT of approximately 2x and funds from operations accounting for just 48% of net debt. Free operating cash flow is negative due to the fairly rapid expansion of TCRS’ purchased book debts. Earnings are fairly strong, reflected by EBIT margin over 30%. Risk position is also fairly strong, with average collection multiple of 3x purchase price. We also factor in adequate levels of liquidity, with further support derived from the NOHC.
The national scale rating outlook is negative, reflecting the potential impact from the strained operating environment. We expect SA Taxi to be more affected by the economic downturn and the restrictions triggered by the COVID-19 pandemic, with earnings and asset quality likely to be hit quite hard. Concurrently, a deterioration in asset quality or capital could lower the ratings on the parent. For TCRS, lower than anticipated receipting on acquired books, pressurising cash flows, could also lower the parent’s ratings.
A downgrade in the group credit profile could stem from weakening SA operating environment, and reduction in the financial profiles for the sister subsidiaries. The upside to the ratings is limited, however sustained reduction in credit losses, increased revenue generation by TCRS in low risk markets, improved business line diversification, and stronger internal capital generation could result in a ratings improvement.
|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|
|Criteria for Rating Financial Services Companies, May 2019|
|GCR Ratings Scale, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, May 2020|
|GCR Financial Institutions Sector Risk Score, June 2020|
Transaction Capital Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Issuer Long Term||Initial||National||A-(ZA)||Stable||November 2016|
|Issuer Short Term||Initial||National||A1-(ZA)||—||November 2016|
|Issuer Long Term||Initial||International||BB-||Stable||November 2016|
Risk Score Summary
|Rating Components & Factors||Risk scores|
|Country risk score||7.75|
|Sector risk score||5.50|
|Management and governance||0.00|
|Capital and Leverage||2.00|
|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 Transaction Capital 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.
Transaction Capital 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 Transaction Capital Limited and other reliable third parties to accord the credit rating included:
- Interim financial results of Transaction Capital Limited as at 31 March 2020;
- Audited financial results of SA Taxi and TCRS as at 30 September 2019;
- Latest internal and/or external audit report to management;
- Industry comparative data.