Thursday, July 18, 2024

BDC got cashflow problems and that leaves it vulnerable, so says Moody’s

Botswana Development Corporation (BDC)’s latest credit rating by Moody’s Investor Service has good and bad news for its sole shareholder, the Botswana government. The good news is that the international credit rating agency has made a notable change on BDC’s outlook, shifting it from ‘negative’ to ‘stable’.

The other part of the good news is that the agency has since reaffirmed BDC’s long-term issuer ratings at Baa3/Prime-3, while simultaneously affirming a b1 Baseline Credit Assessment (BCA).

“Moody’s affirmation of the ratings signifies BDC’s positive trajectory in the post-pandemic economic contraction era, underscored by its robust capital and liquidity buffers. Notably, BDC’s tangible common equity remains solid at 35% of total managed assets, and its coverage ratio for one-year debt maturities was a reassuring 129% as of June 2022,” reads part of the statement on BDC’s Moody ratings.

The bad news is that the state owned company’s cashflow problems make it vulnerable.

“The company’s reliance on dividend income, characterised by high volatility and exclusion from operating cash flow, contributes to this weakness,” says Moody’s.

As a result, the credit rating agency says it is not impressed with BDC’s operational cash flow which continues to be a structural vulnerability, primarily due to its elevated leverage (debt to EBITDA) and a fund from operations to debt ratio.

 Moody’s says BDC contends with elevated asset risk, driven by a high ratio of problem loans to gross loans and concentration risks within its equity and debt investment portfolios. The correlation between the state owned enterprise’s debt and equity portfolios exposes it to added concentration risks affecting its asset quality.

The bad news does not end there. BDC’s legacy problem loans and those that arose during the Covid 19 pandemic continue to impact the company’s asset quality.

“However, Moody’s predicts that a more favourable operating environment will lead to fewer problem loans, while diligent collection efforts will foster improvements in asset quality,” reads part of the statement on BDC’s credit rating.

Moody’s says its alteration on BDC’s outlook reflects the ongoing enhancement of operating conditions and an anticipation that the financial strain on the company will continue to alleviate. The agency said that a key contributing factor is the new agreement between the Government of Botswana and De Beers which is set to amplify diamond production share and elevate fiscal revenues, subsequently stimulating economic activity.

This forecast for the operating environment is expected to bolster BDC’s financial performance, especially in terms of profitability and asset quality. Encouragingly, BDC’s consolidated profitability has already demonstrated signs of recovery in 2022, despite increased impairments from associate companies and elevated funding costs.

For the six months ended December 2022, BDC’s revenue rose by 14 percent to P168 million, owing to an increase in income from debt-based assets and near debt assets. The growth was a result of new investment deals completed in the period as well as market increases in interest rates.

Expenses and operating costs soared by 24 percent to P149.6 million, with the corporation struggling to contain the adverse market forces in the form of rising interest rate environment and the strengthening dollar against the pula.

Given the factors at play, BDC reported a modest profit before tax of P3.2 million, lower than the P8.4 million realised in the six months ended December 2021. The corporation is coming from a loss of P13 million for the full year ended June 2022, compared to 2020’s profit of P35 million.

BDC’s total asset base at the end of December 2022 was recorded at P5.2billion, down 3 percent from the close of the year ended 30 June 2022. The marginal decrease was a result of the utilisation of cash reserves in service of borrowings, notably the Botswana Stock Exchange listed Bond 002 which matured in August 2022. Investment assets grew by 7 percent as a result of investments into various projects in the year, which include rejuvenation of the Lobatse Clay Works operations which are set to go live in the coming months. BDC has in the past said its transformational approach is to invest locally in large-scale export oriented businesses, with focus on citizen economic inclusion. Additionally, the company intends to invest globally in high return commercial and strategic projects, which will integrate Botswana into the world economy through key partnerships with global economic players.

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