Better credit rating for Trustco

Jo-Maré Duddy – The global credit ratings agency, GCR Ratings, has upgraded Trustco Group Holdings from a company whose long- and short-term obligations are highly vulnerable to one whose obligations are vulnerable.

In its credit rating announcement released on Thursday, GCR assigned a Namibian national scale rating of B+(NA) to Trustco’s long-term debt, while its short-term obligations were rated at B(NA). Previously, the ratings were CCC(NA) and C(NA) respectively.

GCR’s definition for B+ (long term) is: “Capacity for timely payment is vulnerable relative to other issuers or obligations in the same country.” It describes B (short term) as: “Low to vulnerable certainty of timely payment of short-term obligations relative to other issuers or obligations in the same country.”

GCR’s outlook on the company is positive on the back of the “expected improvement in Trustco’s financial performance”.

Also on Thursday, Trustco became the first Namibian company to qualify to have its American Depository Receipts (ADRs) trade on the OTCQX Best Market. OTC Markets Group is an American financial market providing price and liquidity information for 10 000 over-the-counter securities. The group has its headquarters in New York City.

US strategy

"Trustco joins fellow South African Stock Exchange listed company, Impala Platinum Holdings Ltd., on OTCQX. Trading on OTCQX provides an efficient US market experience that reflects the prestige of the Johannesburg market and allows Trustco to efficiently execute the company's US strategy," said Jason Paltrowitz, EVP of corporate services at OTC Markets Group.

"Trustco joins fellow South African Stock Exchange listed company, Impala Platinum Holdings Ltd., on OTCQX. Trading on OTCQX provides an efficient US market experience that reflects the prestige of the Johannesburg market and allows Trustco to efficiently execute the company's US strategy," Paltrowitz said.

The managing director of Trustco Group Holdings, Quinton van Rooyen, said: “The company is delighted to begin trading on the OTCQX Best Market joining over 400 established, investor-focused US and international companies.”

Revenue

GCR said its latest ratings on Trustco are supported by the company’s “relatively strong corporate profile in Namibia, the entity’s sectoral diversification and burgeoning international exposure, as well as GCR’s expectations that cash flow and earnings will improve materially over the next two years”.

“This is, however, counterbalanced by expectations that liquidity will remain constrained by the short-dated weighted average debt maturity profile and modest cash flow, alongside the relatively high levels of leverage. GCR does not factor in external support to the ratings,” GCR added.

By next year, GCR expects 20% of Trustco’s revenues to be generated by its resource interests. The company’s other divisions are expected to contribute the following: education (19%), insurance (11%), banking and finance (19%), and land/property (31%).

Diamonds

“However, given the anticipated superior growth of the resources division, we expect the revenue split to change in favour of that division (up to 50% of revenues) going forward,” GCR said.

GCR said while the majority of Trustco’s operations are in Namibia, it expects the Sierra Leone diamond mine to drive/underpin the improvement in cash flows and revenues going forward.

“While this mine introduces higher political and operating risk to the group, given its domicile, GCR is of the view that the global demand and international sale of the diamonds somewhat neutralises the impact of the exposure on country risk,” the ratings agency said.

Risks

“The complexity of group operations, the current reliance on non-cash land revaluations for earnings, and the entrepreneurial family ownership does add management and governance risks to the group, although it has not impacted the ratings at this level,” GCR said.

Trustco is looking to simplify the structure and bring in additional shareholders over the next 12-24 months, GCR said.

“Transparency and disclosure by the entity is considered to be adequate,” it added.

Trustco has improved materially since its last review, but the two-year forward-looking leverage and cash flow levels of the group remain a restraint to the ratings, GCR said.

“In 2018, Trustco and its key funding partners agreed a creditor standstill, under which there were at least two skipped payments of originally contracted principal, due to a breach of covenants and acceleration of debt. Since then, all of the legacy debt has now been restructured, without a haircut on the original principal, or settled early at an appropriate discount.”

Pressure

Trustco’s weighted average maturity (WAM) of its restructured debt, which makes up the lion’s share of total debt, is less than two years, GCR said. This pressurises the group into finding other sources of capital in the next 12-18 months.

“GCR has forecast an additional N$1.1 billion of equity will be introduced over the next two years, either through new shareholder(s) or other treasury operations. Nevertheless, the group will have to find sources of longer-term, stable funding to support its operations and liquidity going forward,” the rating agency said.

Cash flow

GCR expects a “significant improvement” in the group’s cash flow.

“Funds from operations (FFO) are expected to improve to close to 20% of net debt in the next two years, from the negative number in 2018 and 2017.”

GCR said this “improvement will be due to the increasing contribution of cash earnings from the mining operations, instead of the margin/equity enhancement derived from land/property revaluations”.

“Over the next two years, we are anticipating a strong earnings profile of the group, with EBITDA margins over 50%.”

GCR, however, still expects Trustco’s free operating cash flow to be negative for the next couple of years, as capital expenditure bolsters operations, particularly in the mining division.

“Positively, the new debt structure is much less restrictive, with covenants only applicable to new facilities,” GCR said.

Trustco ended Friday at N$9.20 per share on the Overall Index of the Namibian Stock Exchange (NSX), N$5.06 a piece or nearly 35.5% less than the end of 2018.