Business

GCR accords the Industrial Development Corporation of South Africa Limited a rating of AA+(ZA), Outlook Stable

Global Credit Ratings (GCR) has today accorded the Industrial Development Corporation of South Africa Limited national scale Issuer ratings of AA+(ZA), and A1+(ZA) in the long term and short term respectively. The ratings have been accorded a Stable outlook.

The IDC has a long, successful track record of developing industrial companies and supporting them through their lifecycle. Accordingly, the corporation forms a crucial element in the South African Government’s plans to stimulate economic growth through industrialisation, whilst also driving job creation and economic empowerment initiatives.

“As a development agency, the IDC’s mandate allows it to accept a greater level of risk than commercial institutions,” Eyal Shevel, Head of Corporate & Public Sector Debt Ratings at GCR. “To manage this, it has a robust investment approval policy that requires extensive due diligence and credit assessments before any funding can be disbursed. In addition, the corporation has imposed individual transaction and counterparty limits based on an expected maximum loss, such that its capital base is not unduly exposed to potential losses.”

Shevel continued, “In addition, there are several policies in place to manage conflicts of interest and potential political interference. Although the IDC is a State Owned Enterprise, it is overseen by an independent Board of Directors, and has substantial operational independence, particularly with respect to approving specific investments.”

“Operating performance has been constrained by the weak economic environment, particularly as a large portion of the IDC’s investment portfolio relates to mining and metals companies, or those in downstream industries,” adds Shevel.

“As a result, dividend income has decreased over the review period, while a number of large impairments to investments have been incurred. Financial year 2017 did evidence a slight recovery for many of the investments, and thus an increase in earnings, but the IDC’s performance remains highly exposed to commodity price volatility.”

The high exposure to commodity and steel companies has also seen investment valuations eroded somewhat over the review period, although the IDC’s investment portfolio has exceeded R110 billion in all years under review. While this has resulted in an increase in net impairments, the impairment ratio (to asset cost) has remained around 16.7% since Financial Year 2015, below the Board’s threshold of 20%. Impairments have been well controlled due to pro-active, post investment monitoring and support.

Says Shevel, “the IDC maintains a very strong standalone credit profile, which supports the strong rating accorded. Despite debt increasing steadily over the review period to R29.5billion at Financial Year 2017 (Financial Year 2016: R27 billion), the corporation remains lowly geared, with gross debt to equity stable at 35% at Financial Year 2016 and Financial Year 2017, below the Board limit of 60%, and gross debt to investment assets at 23% in both years.”

Around R6 billion in debt matures in Financial Year 2018, for which refinancing is being negotiated, with the remainder of debt fairly long term.

“The IDC has maintained its liquidity coverage ratio above 100% in all periods under review. Liquidity is underpinned by a large cash holdings and funding lines with a range of local and international banks, as well as access to the debt capital market, development agencies and some Government related entities,” concludes Shevel.

Given the strong ratings accorded, there is limited scope for upward movement. This would only be likely if a greater proportion of the investee companies received credit ratings in line with, or exceeding, the South African sovereign rating. Conversely, sustained earnings pressure reported by key investments would impact the IDC’s profitability and cash flows and could result in a downgrade. Any challenges in refinancing or raising new debt would be negatively viewed.

 

NATIONAL SCALE RATINGS HISTORY  
   
Initial/last rating (July 2017)  
Long term: AA+(ZA)  
Short term: A1+(ZA)  
Rating outlook: Stable  

Pin It on Pinterest