Global Credit Ratings (GCR) has affirmed Pinnacle’s issuer ratings of BBB+(ZA) and A2(ZA) respectively, but has placed the company on “Rating Watch” due to the allegations of bribery levelled against former executive director Takalani Tshivhase.
This is according to Eyal Shevel, head of corporate rating at GCR, who said that when affirming the current rating, two factors had to be taken considered: the ongoing financial performance of Pinnacle and the potential impact of the alleged attempted bribery by one of the Pinnacle directors.
With regard to the latter, GCR has remained in contact with Pinnacle and has been closely monitoring all statements from the company. “Very little information is available with respect to the legal proceedings, but GCR is concerned that the situation could have an adverse impact on Pinnacle’s reputation, which in turn could affect supplier and customer relations, and result in lost business volumes, particularly in terms of the public sector,” explains Shevel.
As a result, Shevel says GCR has placed the ratings on “Rating Watch”, and will monitor developments closely and respond accordingly as new information emerges. “Any adverse developments regarding the matter or the unfavourable resolution thereof, could have negative ramifications for the credit rating,” he says.
“In terms of underlying company performance, acquisitions and organic growth have translated to strong top-line performance, a slight widening of margins and strong growth of nominal profits. This has resulted in strong core cash generation and sound debt serviceability, while interest income from the finance lease book has tempered rising interest charges,” says Shevel.
Despite this, he says persistent large working capital absorptions have constrained operating cash flows. “Together with significant acquisition activity (relating in F13 to the acquisition of 35% in Datacentrix) and sustained investment in the finance lease book, this has driven a sharp rise in borrowings and gearing since FYE12.”
With debt having more than doubled since the rating was first conducted just over a year ago, Shevel warned that any further increase in borrowings and deterioration in gearing or debt serviceability measures could drive a negative ratings movement.
“In contrast, reduced working capital and funding pressure would be positively considered, particular if it drives an improvement in key credit risk metrics. Nevertheless, a rating upgrade is dependent on long term sustained growth and diversification of earnings,” Shevel says.
