BY BONNIE MODIAKGOTLA
Global credit ratings giant, Moody’s, has affirmed Botswana Development Corporation (BDC) ratings and has classified the company as stable, thanks in part to the support it enjoys from the Botswana government.
On late Friday Moody’s affirmed BDC issuer ratings at Baa2/Prime-2 upon application of credit ratings agency’s new Finance Companies rating methodology, published last year December. Moody’s added that the outlook on BDC remains stable.
According to a statement from Moody’s, BDC’s long-term Baa2 issuer ratings incorporate a five notch uplift from its b1 baseline credit assessment (BCA), which reflect Moody’s assumption of a high probability of government support – BDC is wholly owned by government – as well as the company’s policy role and importance as Botswana’s leading development finance institution and the lack of legal barriers for its timely support.
Furthermore, the ratings agency says ratings for BDC factored in Botswana’s A2 issuer rating – which acts as an anchor for potential support to BDC – and the very high default dependence, which reflects the strong probability that, in the event of a sovereign credit default, the risk of a potential crisis affecting BDC is very high, the agency said.
“BDC’s b1 BCA balances the company’s strong solvency and liquidity position against its high concentration in a small number of large equity investments and legacy issues that have led to weak asset quality metrics and volatile profitability,” Moody’s said in a statement.
“A successful execution of BDC’s new growth strategy (BDC plans to reduce its exposure to equity investments and increase lending) will likely lead to a reduction of equity investment concentrations and a more resilient earnings profile. BDC’s new growth strategy is also supported by our expectation of continued improvements to BDC’s governance and risk management practices over the next 12 to 18 months.”
Moody’s says BDC maintains strong liquidity metrics, as reflected by a significantly high coverage of maturing debt over the next 12 months, adding that liquidity will be further supported by a greater focus on long-term funding through a tenured note programme and locally issued bonds, and international funding from development finance institutions. The ratings agency further noted that profitability should be more stable owing to a higher contribution from a less volatile interest income component, given increased lending in the asset portfolio and reduced reliance on dividends from equities.
“The outlook on BDC is stable and captures both the stable outlook on the sovereign rating of Botswana (the support provider) and our expectation that BDC’s financial metrics, specifically the company’s capital and liquidity buffers, will remain solid,” Moody’s said.
In April this year, BDC a huge capital injection after the African Development Bank Group (AfDB) approved a line of credit to the state owned investment entity. The $80 million or P858 million-credit extension was approved through AfDB’s private sector window, and the funds will be used by BDC to fund local companies involved in manufacturing, transport, logistics and services sectors. The funded projects are expected to create between 2,500 and 2,800 jobs.
The approval of the $80 million credit facility comes three years later after the Botswana government refused to be a guarantor to BDC’s planned P1 billion bond programme, where P850 million was to be raised from AfDB as a loan. However, the government was not convinced on BDC’s planned investments, forcing the development financing institution to forego discounted borrowing costs that come with having a guarantor, and instead BDC said it would go ahead and access the credit facility, albeit at expensive rates.
A month before the loan approval, the ministry of Investment, Trade and Industry, which BDC falls under, revealed to parliament that BDC has raised P700 million to be disbursed by end of June 2019. Minister Bogolo Kenewendo said the funds were raised from domestic and foreign institutions, and added that the loans were on non-sovereign guaranteed basis.