Despite a low growth economy, which was hit even harder by COVID-19, local small, medium and micro-enterprise financier Retail Capital, has retained its national BB+ credit rating. While its international rating has dropped by one notch to B- in line with South Africa’s credit downgrade in March, both ratings have a stable outlook. This has resulted in local and international investors looking to place more business funding with the lender which will ultimately fall into the hands of South African SMEs that need it.
This is according to Guy Hosking, Chief Financial Officer at Retail Capital, who says that this result is a vote of confidence in the stability of the business. “It shows that the GCR rating agency still sees the company in the same positive light in spite of the economic circumstances.”
In its report, GCR said that the national rating was affirmed, based on the alternative lender’s healthy balance sheet metrics, which saw strong capitalisation, adequate funding and liquidity. The agency maintained its stable outlook on an expectation of strong leverage, buoyed by good earnings and shareholder support. Despite an expected spike in the cost of risk due to the effects of the COVID pandemic, the financier holds adequate capital to see it through the crisis.
A strong balance sheet
Hosking said the strength of the company’s balance sheet was key to the retention of its credit rating and that there were three legs to maintaining this position.
“We have been conservative in managing the balance sheet even before the crisis, he said. “We went into February/March with a positive debt to equity ratio, higher than required and had equity to fall back on if needed.”
The second leg was ensuring liquidity. “We noted the effects of the pandemic in other countries, so we made sure we had sufficient money in the bank,” Hosking said. “This meant that we were able to weather the COVID-19 storm with enough working capital, giving us that runway to survive a lockdown spanning a long period of time. Fortunately the economy opened up sooner than we planned for.”
The third leg was engagement with funders. Hosking said they kept their funders updated with regular reports, which was key to getting stakeholder support. As such, Retail Capital now has both local and international funders who want to place money with the company.
Stable rating is testament to the resilience of small businesses
The credit report notes Retail Capital’s high exposure to SMMEs – or SMEs (small and medium enterprises) – who were massively affected by the shutdown. “90% of the small businesses we fund are in consumer facing businesses, such as restaurants and hospitality, and, as such, the vast majority of our clients were unable to trade in April during Alert Level 5 of lockdown.”
However, the equipment leasing side of Retail Capital remained stable throughout, he explained. “Sixty percent of this was in the medical field, such as equipment for doctors and laboratories, and almost all of these businesses could continue to operate.”
Recognising the impact that the hard lockdown had on the economy, President Ramaphosa made the decision to place the country on lower Alert Levels faster than anticipated and about 80% of Retail Capital’s customers started trading again.
We saw a sharp uptick in the demand for capital once businesses began to reopen, continued Hosking. “These applications included restart capital, support funding for inventory or upgrades and a significant need for capital to start new businesses or to expand existing operations.”
Customer-facing businesses like restaurants, however, now face new challenges with the alcohol ban and the curfew. Hosking explained that alcohol sales could account for 30% of turnover, while the curfew forced restaurants to close early to enable staff to be home before 9 pm. “This restraint of trade poses a short term risk to the industry, however considering the resilience of many of the country’s small businesses, we are positive that the restaurant sector can bounce back once these bans begin to lift again.”
The advantage of a credit rating
It is unusual and not a requirement for an alternative lender of our size to acquire a credit rating, Hosking said. “But it is a good idea because it gives funders a fuller view of our business and the higher the credit rating, the bigger the pool of funding available.”
“Our goal is to reach investment grade, which we have set ourselves to achieve in the near future,” he concluded.