London, 10 September 2021 -- Moody's Investors Service ("Moody's") has today
affirmed The Bidvest Group Limited's (Bidvest) Ba2 corporate family
rating (CFR), as well as the NP short term issuer rating,
the Aa1.za long term national scale CFR, and the P-1.za
national scale short term issuer rating. Moody's has also
assigned a Ba2-PD probability of default rating (PDR) to Bidvest
and a Ba2 rating to the proposed $700 million guaranteed senior
unsecured notes to be issued by The Bidvest Group (UK) Plc (Bidvest UK),
a fully owned subsidiary of Bidvest that is incorporated in the United
Kingdom. A negative outlook has been assigned to Bidvest UK and
the outlook on existing ratings remains negative.
RATINGS RATIONALE
Bidvest's ratings reflect the Group's (1) market leading positions across
a diverse range of businesses with a highly granular client base;
(2) a growing share of recurring and internationally diversified revenue
through expansion of business services operations in Europe; (3)
a conservative financial policy that targets moderate leverage,
with healthy interest cover and good cash flow generation; and (4)
an experienced management team with a successful track record of organic
growth and growth through acquisitions.
The ratings also factor in (1) the company's geographic concentration
in South Africa (Ba2 negative) which accounts for 79% of EBITDA
and the company's exposure to the country's political, legal,
fiscal, social and economic environment; (2) the high correlation
of Bidvest's activities to GDP and increased risk of customer defaults,
especially if the economy recovers slower than expected; (3) increased
exposure to weakening of the Rand as a result of c. 55%
of financial debt denominated in GBP or USD following the contemplated
bond issuance.
Bidvest's earnings and cash flow recovered strongly during the fiscal
year ending June 2021, which allowed the company to deleverage in
line with Moody's expectation. This comes after the initial
COVID-19 related lockdowns severely impacted results a year earlier
and the debt funded acquisition of PHS Group (PHS) in May 2020 increased
leverage, as measured by Moody's adjusted debt to EBITDA,
to a peak of 4.4x. Through strong earnings recovery and
a full year consolidation of PHS and Adcock Ingram, Bidvest deleveraged
to 2.3x as of June 2021. The bond issuance will increase
gross leverage slightly as the company intends to keep some of the bond
proceeds as cash rather than for debt refinancing.
The bond issuance will also strengthen Bidvest's liquidity.
Following the issuance and application of proceeds towards repayment of
the amount outstanding under Bidvest UK's GBP240 million revolving
credit facility as well as towards repayment of at least ZAR3.0
billion of South African local bonds and bank debt, 65% of
the group's debt will be due in FY 2025 or later. The company
will also benefit from a strong unrestricted cash balance of c.
ZAR9 billion and full availability under the GBP240 million committed
RCF (ZAR 4.8billion).
Moody's notes the company intends to continue expansion through
acquisitions outside of its core market in South Africa. While
this improves geographic diversification, it also increases execution
and integration risks. So far the company has a strong track record
in successfully executing acquisitions and the integration of PHS,
its largest acquisition to date, is on track. The issuance
of the bond in US Dollar, which the company plans to swap into GBP,
also increases the company's exposure to weakening of the Rand.
Approximately half the company's debt will be denominated in US
Dollar and British Pound, while only 20-30% of cash
flow will be British Pound and Euro based, with the remainder in
Rand. This exposes the company to increasing debt servicing costs
if the Rand depreciates against the British Pound.
SENIOR UNSECURED NOTES
The contemplated $700m notes will be issued by Bidvest UK,
a fully owned subsidiary of Bidvest. Bidvest UK is the holding
company for the group's international businesses and fully owns PHS and
Noonan. The notes will benefit from a guarantee from Bidvest and
rank pari passu with a GBP400 million syndicated bank facility originated
by Bidvest UK and guaranteed by Bidvest. There is no significant
operating debt at PHS and Noonan. As leverage at Bidvest UK is
materially higher than at Bidvest Group level we don't consider priority
over cash flows from Bidvest UK as a significant structural advantage
over Bidvest's remaining creditors.
Bidvest's other debt amounts to c. ZAR11 billion of local ZAR bonds
and ZAR bank debt, after factoring in a planned c. ZAR3 billion
repayment from bond proceeds. This debt is primarily issued by
South Africa based finance companies with no operations and guaranteed
by Bidvest. The guarantee from Bidvest ensures all of the group's
debt ranks pari passu with regards to cash flows from the group's South
African operations, which account for the majority of the group's
assets and cash flows.
OUTLOOK
The negative outlook reflects Bidvest's operational concentration
in South Africa, exposing the company to the heightened risks associated
with the operating environment in South Africa. The rating outlook
is therefore aligned to that of the sovereign rating. The outlook
could be changed to stable if the Government of South Africa's rating
outlook is changed to stable.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, an upgrade is unlikely in the near-term.
The outlook could be changed to stable if the Government of South Africa's
rating outlook is changed to stable. Subject to an upgrade of the
South African government bond rating, an upgrade of Bidvest's
ratings could be considered, if there is no deterioration in the
company's market position and liquidity profile. For an upgrade
we would also expect gross debt/EBITDA to remain below 3.0x and
EBITA/interest expense to remain above 4.0x, both on a sustainable
basis.
Bidvest's ratings are likely to be downgraded in case of a further downgrade
of South Africa's sovereign rating, although Moody's will
continue to monitor the company's geographical diversification and
resilience of its credit profile against macro-economic shocks.
A downgrade would also be considered if Bidvest's liquidity profile
weakens or if there is an erosion in the group's operating performance
or higher debt levels, such that EBITA/interest reduces below 2.25x
or Gross debt/EBITDA increases above 4.0x, both on a sustained
basis.
PRINCIPAL METHODOLOGY
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Moody's National Scale Credit Ratings (NSRs) are intended as relative
measures of creditworthiness among debt issues and issuers within a country,
enabling market participants to better differentiate relative risks.
NSRs differ from Moody's global scale credit ratings in that they are
not globally comparable with the full universe of Moody's rated entities,
but only with NSRs for other rated debt issues and issuers within the
same country. NSRs are designated by a ".nn"
country modifier signifying the relevant country, as in ".za"
for South Africa. For further information on Moody's approach to
national scale credit ratings, please refer to Moody's Credit rating
Methodology published in May 2016 entitled "Mapping National Scale Ratings
from Global Scale Ratings". While NSRs have no inherent absolute
meaning in terms of default risk or expected loss, a historical
probability of default consistent with a given NSR can be inferred from
the GSR to which it maps back at that particular point in time.
For information on the historical default rates associated with different
global scale rating categories over different investment horizons,
please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1280297.
The local market analyst for this rating is Lisa Jaeger, +971
(423) 796-59.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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The Global Scale Credit Rating on this Credit Rating Announcement was
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Artem Frolov
VP - Senior Credit Officer
Corporate Finance Group
Moody's Interfax Rating Agency
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