Rating action follows the sovereign rating's review announcement
Johannesburg, April 04, 2017 -- Moody's Investors Service ("Moody's") has today placed
all the global scale ratings assigned to The Bidvest Group Limited ("Bidvest")
under review for downgrade.
Today's rating action on Bidvest follows the potential weakening of the
South African government's credit profile, in particular in the
country's institutional, economic and fiscal strength,
as captured by Moody's recent decision to place South Africa's Baa2 government
bond ratings on review for downgrade. For further information,
refer to the sovereign press release "Moody's places South Africa's Baa2
ratings on review for downgrade" (https://www.moodys.com/research/--PR_364595).
A full list of affected ratings is provided towards the end of this press
release.
RATINGS RATIONALE
The rating under review reflects Bidvest's operational concentration
in South Africa, exposing the company to the heightened risks associated
with the operational environment in South Africa. As a result Moody's
views Bidvest's ratings as being highly correlated with South Africa's
long term bond rating.
The review will assess the credit implications on Bidvest's ratings following
the conclusion of the review for downgrade on the bond ratings of South
Africa.
Bidvest's Baa2 long term issuer rating reflects the Group's (1) strong
operational and financial profile; (2) diversified sources of revenue
across a range of businesses; (3) low financial debt leverage,
with healthy interest cover and good cash flow generation in the context
of the high volume, low margin nature of many of its activities;
and (4) experienced management team with a successful track record of
organic growth and growth through acquisitions, which have been
effectively integrated into the Bidvest network while being managed on
a decentralized basis.
The rating is mainly constrained by (1) low growth environment,
and weak business and consumer sentiment in South Africa; (2) event
risk from debt-financed acquisitions that may overstretch current
leverage levels; and (3) limited geographic diversification.
The ratings also consider the credit linkage to the South African government
bond rating given Bidvest's predominant exposure to South Africa following
its unbundling of its Foodservices business.
Founded in 1988 and based in Johannesburg, South Africa, The
Bidvest Group Limited is a service, trading and distribution company
with operations in South Africa and Namibia. Its businesses operates
nine divisions: Automotive, Commercial Products, Electrical,
Financial Services, Freight, Office & Print, Services,
Bidvest Namibia (Namibia Commercial and Fisheries) and Bidvest Corporate
(property portfolio and associate investments).
For the last twelve months to 31 December 2016, Bidvest had reported
revenues of ZAR69.7 billion (US$4.7 billion) and
reported EBITDA of ZAR7.4 billion (US$0.5 billion).
List of affected ratings:
On Review for Downgrade:
..Issuer: Bidvest Group Limited, The
.... Issuer Rating (Local Currency),
Placed on Review for Downgrade, currently Baa2
.... Short Term Issuer Rating (Local Currency),
Placed on Review for Downgrade, currently P-2
Outlook Actions:
..Issuer: Bidvest Group Limited, The
....Outlook, Changed To Rating Under
Review From Negative
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016. Please see the Rating
Methodologies page on www.moodys.com for a copy of this
methodology.
Glossary of Terms and Acronyms
Credit Rating: A Credit Rating is an opinion from Moody's Investors
Service (MIS) regarding the creditworthiness of an entity, a debt
or financial obligation, debt security, preferred share or
other financial instrument, or of an issuer of such a debt or financial
obligation, debt security, preferred share or other financial
instrument, issued using an established and defined ranking system
of rating categories.
Debt: Long term debt (including liability for capital leases) plus
short term debt plus current portion of long term debt. May also
be adjusted to include other long term obligations, such as leases
and pensions.
EBITDA: EBIT plus depreciation plus amortisation of intangible assets.
EBITA and EBITDA may be used as an indication of earnings available to
service debt and capital expenses.
Global Scale Long Term Credit Rating: Long-term ratings are
assigned to issuers or obligations with an original maturity of one year
or more and reflect both on the likelihood of a default on contractually
promised payments and the expected financial loss suffered in the event
of default.
Global Scale Ratings: Ratings assigned on Moody's global long-term
and short-term rating scales are forward-looking opinions
of the relative credit risks of financial obligations issued by non-financial
corporates, financial institutions, structured finance vehicles,
project finance vehicles, and public sector entities.
Global Scale Short Term Credit Rating: Short-term ratings
are assigned to obligations with an original maturity of thirteen months
or less and reflect the likelihood of a default on contractually promised
payments.
Issuer: The term Issuer means any entity by which a Security has
been issued, guaranteed, or by which the credit underlying
a Security has been otherwise supported. The term Issuer also includes
the corporate parent or majority-owned subsidiary of an Issuer.
Issuer Rating: Issuer Ratings are opinions of the ability of entities
to honor senior unsecured financial counterparty obligations and contracts.
Outlook: An Outlook is an opinion regarding the likely direction
of an issuer's rating over the medium term.
Rating Outlook: A Moody's rating outlook is an opinion regarding
the likely rating direction over the medium term. Rating outlooks
fall into four categories: Positive (POS), Negative (NEG),
Stable (STA), and Developing (DEV). Outlooks may be assigned
at the issuer level or at the rating level.
Rating Review: A rating review indicates that a rating is under
consideration for a change in the near term. A rating can be placed
on review for upgrade (UPG), downgrade (DNG), or more rarely
with direction uncertain (UNC). A review may end with a rating
being upgraded, downgraded, or confirmed without a change
to the rating. Ratings on review are said to be on Moody's "Watchlist"
or "On Watch".
For further information on these definitions or on Moody's ratings symbols,
please consult the Rating Symbols and Definitions document on www.moodys.com
REGULATORY DISCLOSURES
The rating for MDY:821785765, LT Issuer Rating, ISSUER
RATING, ZAR of Bidvest Group Limited, The was initially assigned
on 11 May 2016 and the last Credit Rating Action was taken on 19 Dec 2016.
The rating for MDY:821785765, ST Issuer Rating, ISSUER
RATING, ZAR of Bidvest Group Limited, The was initially assigned
on 11 May 2016 and the last Credit Rating Action was taken on 19 Dec 2016.
Only credit rating actions issued by Moody's Investors Service South
Africa (Pty) Ltd are considered for the purpose of this disclosure.
Please see the ratings tab on the issuer page on www.moodys.com
for additional rating history details. The date on which some ratings
were first released goes back to a time before Moody's ratings were
fully digitized and accurate data may not be available. Consequently,
Moody's provides a date that it believes is the most reliable and
accurate based on the information that is available to it.
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Moody's considers a rated entity or its agent(s) to be participating
when it maintains an overall relationship with Moody's. On
this basis, the rated entity or its agent(s) is considered to be
a participating entity. The rated entity or its agent(s) generally
provides Moody's with information for the purposes of its ratings
process.
The main assumptions underlying the methodology used to determine the
credit ratings are:
1) Expected future trends for the relevant industry(ies) structure,
competitive dynamics, supply & demand, regulatory environment,
and technology are assumed to be predictive for the likelihood of default
and expected loss.
2) Expectations for competitive/market position and management's
capabilities and approach to business and financial risks are assumed
to be predictive for the likelihood of default and expected loss.
3) Indicators for profitability, interest coverage, and asset
quality are assumed to be predictive for the likelihood of default and
expected loss, and the rating category criteria are believed to
be appropriate.
4) Indicators for cash flow generation, leverage, and debt
coverage are assumed to be predictive for the likelihood of default and
expected loss, and the rating category criteria are believed to
be appropriate.
5) Expectations for legal, regulatory, liquidity, and
financial market risks, mergers/acquisitions and recapitalization
events, integrity of financial reporting, corporate governance,
and the likelihood and nature of support or weakening influence from a
parent, affiliate, government or financial party are assumed
to be predictive for the likelihood of default/expected loss.
Information sources used to prepare the ratings are the following:
parties involved in the rating, parties not involved in the rating,
public information, and confidential and proprietary Moody's
information.
Information types used to prepare the ratings include the following:
Financial data, Public information, Moody's information,
and Regulatory filings.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
this review and of appropriate quality relative to that available for
similar rated entities, obligations or credits.
Moody's considers the quality of information available on the rated
entity, obligation or credit satisfactory for the purposes of issuing
a rating. Moody's adopts all necessary measures so that the
information it uses in assigning a credit rating is of sufficient quality
and from sources Moody's considers to be reliable including,
when appropriate, independent third-party sources.
However, Moody's is not an auditor and cannot in every instance
independently verify or validate information received in the rating process.
The ratings have been disclosed to the rated entity prior to public dissemination.
Credit ratings are Moody's current opinions of the relative future credit
risk of entities, credit commitments, or debt or debt-like
securities rated by Moody's. Moody's defines credit risk as the
risk that an entity may not meet its contractual, financial obligations
as they come due and any estimated financial loss in the event of default.
Credit ratings do not address any other risk, including but not
limited to: market liquidity risk, market value risk,
or price volatility. Credit ratings are not statements of current
or historical fact. Credit ratings do not constitute investment
or financial advice, and credit ratings are not recommendations
to purchase, sell, or hold particular securities. Credit
ratings do not comment on the suitability of an investment for any particular
investor. Moody's issues its credit ratings with the expectation
and understanding that each investor will make its own study and evaluation
of each security that is under consideration for purchase, holding,
or sale.
1) An entity's competitive position is expected to be stable over
the 18 -- 24 month rating horizon and generally will not lead to
rating volatility. Unexpected changes in technology, regulation,
market participants or consumer preferences that negatively (or positively)
impact an entity's competitive position within its market,
may lead to multiple notch ratings changes during the course of the ratings
horizon.
2) Operating strategy effectiveness is typically evidenced by an entity's
performance metrics over the medium to long term, typically beyond
the rating horizon, and generally will not lead to rating volatility.
Changes in performance metrics during the 18-24 month rating horizon
will not generally lead to high degrees of rating volatility (more than
1 rating notch). Sustained improvement or deterioration in performance
metrics beyond Moody's expectations could lead to multi notch rating
changes.
3) Rating levels are highly sensitive to financial strategy. Material
changes to financial strategy which increase or decrease financial risk
and liquidity may change the entity's ability to weather financial
and business cycles. A change in appetite for financial risk may
lead to multi-notch downward rating changes. Changes in
financial strategy which reduce risk are likely to lead to single notch
upward rating changes during the rating horizon.
4) Rating levels can be sensitive to changes in assumptions about an entity's
financial position. Metrics that measure financial position tend
to vary within a range of expected levels during the course of an 18 --
24 month rating horizon, and modest variances are not expected to
lead to multi-notch rating changes. Large, unexpected
changes to assumptions regarding financial position, including measures
related to financial leverage, liquidity, and resources available
to meet financial obligations, may trigger multi-notch rating
changes over the ratings horizon.
5) Rating levels can be greatly impacted by changes in governance structure.
Corporate governance is expected to be stable during and beyond the rating
horizon, and therefore not cause volatility in ratings. Material
changes in governance, ownership structure, or support to
or from other entities are likely to lead to multi notch rating changes.
The sensitivity to assumptions for the credit ratings are:
1) Moody's assumptions about the entity's competitive position
within its business sector are presumed to remain stable over our rating
horizon (18-24 months). Factors that can affect the entity's
competitive position include changes in market share over time; disruptive
pricing affecting either a) customer demand or b) the cost of supplying
goods or services; new market entrants; barriers to entry of
new competitors; or product substitution. If Moody's
assumptions of competitive position are inaccurate, and the entity
experiences forces which are expected to lead to sustained improvement
or degradation in competitive position for the longer term, this
may cause ratings to move upwards or downwards, depending on the
speed of change and the entity's ability to react to the change.
Discovery of taint in food or consumer goods has caused rapid rating changes
for individual entities and entire sectors. As an example,
the discovery of mad cow disease in the US in 2003 caused a shutdown in
worldwide export markets for US beef processors. Several companies
in the sector were downgraded as a result of the expected impact of the
disruption to their business. Similarly, discover of listeria
or other taint in foodstuffs has resulted in downward ratings movement.
Over a 10-year period, the shift in sales of consumer electronics
toward online channels resulted in a significant deterioration in sales
at traditional "brick and mortar" retailers. A number
of the latter experienced ratings downgrades due to their deteriorating
competitive position, which was followed by a decline in their financial
position.
Market share, a measure of competitive position, can change
very quickly in apparel retailing. For example, a change
in preference of women's apparel from high priced fashion styles
to less-expensive, more fashion forward 'fast fashion'
companies resulted in lower market share and significant financial weakness
for retailers of higher priced fashion apparel, accompanied in some
cases by rating downgrades. Beneficiaries of the trend included
discount retailers, which enjoyed an enhanced credit profile.
A long term trend may change pricing dynamics for an entire industry segment,
resulting in rating changes throughout the segment. For example,
railroads invested significantly in improving the reliability of the entire
network. As a result, the entire industry was able to increase
prices in excess of operating costs, and to a level sufficient to
cover the cost of invested capital. This ultimately resulted in
a steady increase in profits and cash flow, which enabled declines
in leverage and led to higher ratings for a number of companies in the
sector.
2) Moody's assumes that an entity's business profile,
which incorporates its operating strategy, will evolve slowly,
and is therefore unlikely to lead to rating changes over the 18 --
24 month rating horizon. Business profile captures fundamental
differences between entities in the same sector. An entity's
overall business profile incorporates expectations of volatility in sales
and earnings; the perceived strength of the entity's position
in its market; and characteristics of its product offering,
such as differentiation with competitive offerings and proven adoption
by customers. Operating strategy encompasses decisions regarding
the entity's supply chain and distribution channels; decisions
regarding outsourcing production versus operating production facilities;
directing growth capital towards acquisitions rather than internal development;
or divesting a stable but mature business for one which is believed to
offer greater future growth at the cost of higher near-term investment.
Ratings are sensitive to differences in business profile. For example,
higher levels of product, segment or geographic diversification
are generally a positive factor which is likely to reduce volatility in
sales and earnings. The entity's degree of vertical integration
has mixed considerations for ratings; vertical integration provides
greater control over sourcing and distribution, but also creates
a higher level of fixed costs which may be a burden during periods of
cyclical declines.
An entity's business profile will change slowly, generally
due to strategic decisions which are executed in the long term,
and therefore will rarely be the source of short term rating changes.
If there is an unexpected change in business profile, such as a
decision to add or divest business segments or enter new markets within
a short period of time, it could result in rating changes of one
or more notches to reflect the new view of risk and opportunities over
the rating horizon.
A change in business profile can happen rapidly with certain new product
introductions. For example, a pharmaceutical company receives
regulatory approval for a drug that treats a given disease, and
which is seen a significantly more effective than existing drugs on the
market. The business profile of company with new drug is greatly,
and quickly, enhanced, creating positive rating momentum.
Meanwhile, the business profile for the producer of the older drug
declines, which would be expected to lead to downward rating momentum
over the medium to longer term in the absence of other changes to its
business structure or product line.
In another example, a restaurant company with multiple brands decided
to spin-off a sizable restaurant concept. This meaningfully
reduced its brand diversification and resulted in a ratings downgrade.
Longer term operating strategy impact is demonstrated by the ratings downgrades
experienced by several US department store operators. Over a period
of years, these companies were unable to adjust to changing consumer
preferences towards different types of venues and product assortments.
Sales declined meaningfully bringing down operating expectations.
The companies experienced multi-notch downgrades due to declines
in operating expectations over the longer term.
3) Moody's ratings include assumptions about financial strategy
and financial policy over the next 18 -- 24 months. Assumptions
include management's appetite for debt incurrence and financial
leverage; planning for debt maturities; management's decisions
regarding deployment of capital; and deployment of profits (shareholder
returns vs. investment in the business).
Examples of changes to financial policy may be in the form of a shift
in dividend policy; a change in how to finance seasonal working capital
or manage timing of payables; or decisions of how much cash to hold
in reserves to soften the impact of business cycles.
Financial strategy is generally stable over the rating horizon.
Unanticipated changes to a company's financial strategy, which
may be accompanied by significant changes in financial leverage or capitalization,
may lead to rating changes of one or more notches upwards or downwards.
Examples of financial policy changes which are common across all industry
sectors include the decision to institute a large, one-time
dividend or share repurchase program which could have a downward rating
impact of one or more notches. A decision to reduce dividends can
also have the effect of stabilizing ratings that might otherwise go down.
In a specific example, a large operator of chain restaurants decided
to return a sizable amount of cash to its shareholders through debt-financed
share repurchases, while targeting to maintain significantly higher
leverage than in the past. A multi-notch ratings downgrade
followed the announcement.
Another example of financial strategy is the "rent vs. own"
decision with regards to real estate made by brick and mortar retailers.
Ownership of property generally lowers costs and creates financial value
which helps maintain ratings through cyclical declines which might otherwise
cause ratings to fall. This strategy may be insufficient to maintain
ratings in the long term if a company is unable to respond to other changes
in the market over a longer term. One well established electronics
retailer experienced multiple ratings downgrades, and ultimately
went bankrupt, despite its financial resources and relatively low-cost
store base. Those strengths were not sufficient to overcome a long
term decline in its sales when the company failed to develop a meaningful
internet-based presence.
An example of a positive rating change occurred when a media company's
new owner committed to a less aggressive growth policy, which was
expected to retain cash within the company and ultimately lead to stable
or reduced leverage.
4) Moody's assumptions about this entity's governance structure
within its market(s) are generally stable over our rating horizon (18-24
months).
Factors affecting governance include changes in ownership or control of
the entity's operational and strategic decision making; support
provided to, or received from, other corporate or government
entities; the strength and independence of management; and participation
in mergers, acquisitions or divestitures.
Changes to an entity's governance are rare but could result in multi-notch
rating changes as it could positively or negatively impact the entity's
future operating strategy and financial position.
Governance changes are common at the time of a sale or leveraged buy-out
of a company, due to a change in financial policies which are expected
to be adopted by the new owners. For example, expectations
are that a sale to a financial buyer will be accompanied by financial
policies which are associated with a higher risk profile. These
types of transactions generally result in ratings being lowered by multiple
notches at the time of the transaction. Conversely, a sale
to a buyer (either company or investor) or an initial public offering
of stock is associated with more benign financial policies, and
may lead to an upgrade of one or more notches at the time of the sale.
In a specific example, the general membership of a large agricultural
cooperative dismissed its entire board of directors and attempted to sell
the Coop's business and brands to another industry player.
Ratings were placed under review repeatedly as events developed,
and ratings were lowered by two notches during a one-year period.
5) Moody's ratings include assumptions about this entity's
financial position, as measured by financial metrics, over
the next 18 -- 24 months. Assumptions include the entity's
anticipated earnings levels, operating expenses, interest
rates paid on debt, and cash flow generation, all of which
contribute to an entity's financial metrics.
These measures may be impacted by unanticipated expenses, changes
to interest rate levels, tax changes or business decisions that
change expenditure or capital levels.
Modest changes to financial metrics over short periods are typical within
most companies and industries. Ratings are not generally sensitive
to modest changes in financial metrics which are due to expected business
cycles or economic cycles and which are not seen as affecting an entity's
long term viability or business profile. However, expectations
that an entity's financial metrics are likely to change meaningfully
(either positively or negatively) for a longer term could lead to rating
changes of one or more notches upwards or downwards.
Examples that are common among all industries include one-time
debt-funded share buybacks of significant size, which increase
debt and cause leverage ratios to remain at higher levels than previously
expected into the future. Rating downgrades of one or more notches
are common in response to these scenarios.
Please see Moody's Rating Symbols and Definitions on the Ratings
Definitions page on www.moodys.com for further information
on the meaning of each rating category and the definition of default and
recovery.
Moody's credit ratings are opinions of the relative credit risk
of financial obligations translating into an ordinal ranking of issuers
and financial obligations across asset classes and geographies.
As such, no absolute probability of default nor expected loss given
default is assigned to each individual credit rating. Please refer
to the following link for an index of Moody's default studies.
Guides to Moody's Default Research.
Please see Moody's Rating Symbols and Definitions on the Ratings
Definitions page on www.moodys.com for further information
on the time horizon in which a credit rating action may be expected after
a review or outlook action took place.
I hereby attest, as a person with responsibility for this Credit
Rating Action, that to the best of my knowledge, based on
(i) my participation in the rating committee that determined to take this
Credit Rating Action, (ii) any materials I have reviewed in connection
with the rating committee, and (iii) the attestations I have received
from other members of the rating committee:
1) No part of this Credit Rating Action was influenced by any other business
activities of Moody's Corporation-- i.e.,
this Credit Rating Action was not affected by the existence of,
or potential for, other business relationships between Moody's
Investors Service or its affiliates and the Rated Entity or its affiliates,
or the non-existence of any such relationships;
2) This Credit Rating Action was based solely on the merits of the obligor(s),
security(ies) or instrument(s) being rated; and
3) This Credit Rating Action was an independent evaluation of the credit
risk of the obligor(s), security(ies), or instrument(s) assessed
in this Credit Rating Action and is subject to the potential limitations
of the Credit Rating disclosed with this Credit Rating Action.
David Staples, Managing Director - Corporate Finance
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Dion Bate
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service South Africa (Pty) Ltd.
The Forum
2 Maude Street
2196 Sandton
Johannesburg
South Africa
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
David G. Staples
MD - Corporate Finance
Corporate Finance Group
Telephone: 00971 4237 9536
Releasing Office:
Moody's Investors Service South Africa (Pty) Ltd.
The Forum
2 Maude Street
2196 Sandton
Johannesburg
South Africa
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
