Tuesday 27, June 2017 by Matthew Amlôt

Moody's assigns Baa2/P-2 issuer ratings to Botswana Development Corporation; outlook stable

Moody's Investors Service (Moody's) has today assigned first-time Baa2/Prime-2 issuer ratings to Botswana Development Corporation (BDC), with a stable outlook on the Baa2 long-term ratings.

The assigned issuer ratings reflect BDC's standalone credit profile of b1, supported by its strong solvency and liquidity position; 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 government, through the Ministry of Trade and Industry, owns 100 per cent of its shares.

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.

RATINGS RATIONALE

--- HIGH PROBABILITY OF SUPPORT FROM THE GOVERNMENT OF BOTSWANA

BDC's Baa2 issuer rating is underpinned by Moody's assessment of a high probability of government support given the government's 100 per cent 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.

--- STANDALONE CREDIT PROFILE

According to Moody's, BDC's b1 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.

A STRONG SOLVENCY, FUNDING AND LIQUIDITY POSITION

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 per cent-50 per cent over the next three years, from an unconsolidated 73 per cent as of June 2016. BDC also maintains strong liquidity metrics, with the June 2016 24-month coverage ratio standing at 98 per cent (measured as the percentage of cash, cash equivalent and committed, unsecured bank lines available to cover maturing debt over the next 24 months). While liquidity metrics may drop slightly, this will partly be countered by BDC raising long-term funding, from both development finance institutions and through a tenured note programme and locally issued bonds.

LEGACY ISSUES LEAD TO A HIGH CONCENTRATIONS AND WEAK ASSET QUALITY

BDC's legacy high-risk investment strategy had a poor track record, particularly between 2007 and 2012, resulting in a number of investments being written-off or significantly impaired, and leading 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 per cent of total net investments (95 per cent 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 per cent 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.

WHAT COULD MOVE THE RATING -- UP/DOWN

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. A potential upgrade of Botswana's A2 (stable) sovereign rating would also put upward pressure on BDC's issuer ratings.

Downward pressure on BDC's ratings could develop if the company significantly increases its leverage, reduces its capital metrics beyond Moody's 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 signaling a weakened capacity of the authorities to provide support in case of need.

Features & Analyses