Moody�s lends support to BDC�s new strategy
Staff Writer | Thursday July 20, 2017 15:24
Announcing a first ever rating on BDC, Moody’s hailed the corporation’s new strategy where they intend to increase debt investments to as much as 75% of total investments.
“As part of its new strategy, BDC also intends to reduce equity exposures and increase 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.
“Positive rating pressure will be exerted if BDC successfully executes its new business strategy, including a re-balancing of the portfolio and reduction of associated investment concentrations, leading to a more resilient earnings profile and improved asset quality metrics, while maintaining strong capital buffers,” Moody’s stated.
In 2013, BDC had to write off as much as P500 million in a failed glass project in Palapye, which was the highlight of its high-risk investment strategy that led to earnings volatility and weighing on asset quality metrics. 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.
Moody’s however acknowledged that the progress was being 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 business remodelling programme, including a management overhaul to strengthen its venture capital, risk management and finance capabilities both domestically and regionally.
Looking forward, Moody’s said downward pressure on BDC’s ratings could develop if the company significantly increases its leverage, reduces its capital metrics beyond current expectations, and fails to improve its investment performance track record, which will in turn weigh on asset quality and profitability.
“Ratings will also be under pressure if Moody’s considers that there is a lower probability that the government would support BDC, in case of need and/or if the Botswana government bond rating is downgraded signalling a weakened capacity of the authorities to provide support in case of need,” Moody’s stated.
Meanwhile, Moody’s has assigned first-time Baa2/Prime-2 issuer ratings to BDC, with a stable outlook on the Baa2 long-term ratings.
The Baa2 rating means obligations rated are deemed to be of medium grade and are subject to moderate credit risk and as such may possess speculative characteristics.
Moody’s say the assigned issuer ratings reflect BDC’s standalone credit profile, supported by its strong solvency and liquidity position and is in addition to Botswana’s A2 (stable) issuer rating acting as the ‘anchor’ for potential support.
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. The positive ratings come at a time when BDC is raising funds from partnerships with regional development finance institutions.
Bashi Gaetsaloe joined BDC, as the managing director effective April 2014 tasked with the transformation of the business and its five-year strategy in which his target was to double the corporation’s P3.6 billion balance sheet in five years. When he took over the reigns at the government investment arm, BDC was a troubled entity weighed down by some subsidiaries that perennially bled losses.