Rating agency Moody’s has assigned first-time Baa2/Prime-2 issuer ratings to Botswana Development Corporation (BDC), with a stable outlook on the Baa2 long-term ratings.
The ratings outlook is stable. This is the first time that Moody’s assigned ratings to a parastatal in Botswana.
Moody’s Communications Strategist Abi Jones says that the assigned issuer ratings reflect BDC’s standalone credit profile of b1, supported by its strong solvency and liquidity position.
This is also in addition to Botswana’s A2 (stable) issuer rating acting as the “anchor” for potential support; and Moody’s assessment of a high probability of government support, in case of need, reflecting BDC’s sole government ownership.
The ratings have been assigned in accordance with Moody’s government-related issuers (GRI) rating methodology.
Established in 1970, BDC is Botswana’s leading development finance institution.
The statement says that the stable outlook reflects both the stable outlook on Botswana’s A2 sovereign rating and Moody’s expectations that BDC’s financial metrics — specifically its capital and liquidity buffers — will remain solid.
Jones said BDC’s Baa2 issuer rating is underpinned by Moody’s assessment of a high probability of government support given the government’s 100% ownership, BDC’s public policy mandate, and the government’s track record of providing support. Specifically, the government guarantees part of BDC’s debt obligations and commits not to allow BDC to enter into liquidation.
“Although BDC is independently managed, the government has two members on the company’s board (the permanent secretaries of the Ministry of Trade and Industry and the Ministry of Finance), while BDC’s mandate, strategy and focus are aligned with Botswana’s development targets and strategic priorities,” said Jones.
According to Moody’s, BDC’s standalone credit profile balances its currently strong solvency and liquidity position against its high exposure to a small number of large equity investments, and legacy issues that have led to weak asset quality metrics and volatile profitability.
Moody’s noted that BDC has a very strong funding and liquidity position, with limited leverage on its balance sheet. Moody’s expect its capital, funding and liquidity position to remain strong, despite the company targeting higher leverage as part of its growth strategy. Accordingly, Moody’s expects BDC’s equity-to-assets ratio to drop to a still strong 40%-50% over the next three years, from an unconsolidated 73% as of June 2016.
BDC has historically invested primarily in equity stakes, including majority stakes in unlisted greenfield and start-up investments. This has led to significant investment concentrations, with the net value of the top five investments standing at 78% of total net investments (95% of equity) as of June 2016.
However, Moody’s acknowledges the progress made in addressing these legacy issues, with adequate provisions held against non-performing exposures and the strengthened processes and practices supporting investment decisions going forward. Since October 2013, BDC has implemented a major transformation (business remodelling) programme, including a management overhaul to strengthen its venture capital, risk management and finance capabilities both domestically and regionally.
“As part of its new strategy, BDC also intends to reduce equity exposures and increase debt (loans and preference shares) exposure to around 75% of total investments. A successful execution of BDC’s new growth strategy will likely lead to a more resilient earnings profile and stronger asset quality,” Moody’s said.
