Moody's assigns Pepkor first-time rating as it considers raising funds in the bond market

Ratings agency Moody's on Monday assigned SA-based retail chain Pepkor a first-time rating, as the retailer seeks opportunities in the capital bond market to diversify its sources of funding.

Moody's assigned Pepkor an A3.za national scale rating with a stable outlook. National scale ratings are a measure of creditworthiness, but are not globally comparable.

"The A3.za ratings assigned to Pepkor reflects its moderate leverage and the resilience of its business profile stemming from its leading position as South Africa's largest non-grocery retailer," said Lahlou Meksaoui, a Moody's lead analyst for Pepkor.

The A3.za ratings indicates the risk of defaulting on investors and creditors is low.

In a notice issued to shareholders on Monday, Pepkor said it is "considering opportunities in the capital bond market with the objectives of diversifying its sources of funding and reducing financing cost." This supports the retailer's goal to reduce its leverage (the company's debt to equity ratio) in the medium term.

Pepkor is SA's largest non-grocery retailer, and the second largest retailer. It owns discount stores PEP and Ackermans which chiefly cater to the lower middle market consumer segment. Its majority shareholder is troubled multinational retailer, Steinhoff [JSE:SNH], which is currently in a process of restructuring its debt.

While Steinhoff owns 71% of the company, Pepkor says that Steinhoff is not operationally involved in the running of the company. The group changed its name to Pepkor from Steinhoff Africa Retail in August 2018 in an effort to distance itself from Steinhoff.  

Moody's says it does not expect Steinhoff's woes to have "material adverse interference" on the company's rating for the next 18 months and assigned it a stable outlook. In addition, Moody's expects Pepkor's liquidity to be sufficient which contributed to the rationale for a stable outlook.

But Moody's pointed out that Pepkor's current rating is constrained due to the uncertainty facing Steinhoff.  "Steinhoff's liquidity pressures could resurface after the standstill agreement entered into with creditors lapses at the end of 2021," Moody's said.

Pepkor's rating or outlook could benefit from a change in ownership – as long as the retailer continues to perform in line with Moody's expectation and keeps its liquidity in check and maintain strong market positions.

"A downgrade could occur if Pepkor creditors' interests were weakened due to Steinhoff interference through its majority shareholding. Any marked deterioration in Pepkor's liquidity profile could also place pressure on the ratings," Moody's warned.

Strong liquidity

Further to Moody's report on Pepkor's credit rating and outlook, the retailer boasts with a "strong position" in the South African retail market through its clothing and general merchandise stores – PEP and Ackermans – which contribute more than 80% of the group's operating profits.

The PEP brand is also recognisable among "budget-conscious" consumers, which sees an "upside" in sales during periods where consumers experience pressure on their disposable income, the ratings agency said. Moody's also noted that Pepkor has had stable credit metrics over the past three years and has a "good liquidity profile" and "conservative financial policies". Finally, both PEP and Ackermans have managed to keep the cost of doing business low.

Former Steinhoff board chairperson Christo Wiese's Titan Group of companies is suing Steinhoff. Pepkor used to be part of Titan, but in 2015 Steinhoff had acquired Pepkor from Titan in exchange for Steinhoff shares. Following the resignation of former Steinhoff CEO Markus Jooste in December 2017 at the start of an accounting scandal Steinhoff's share price plummeted. Shareholders have launched a number of class action law suits in a bid to recoup their losses.

Pepkor's share price opened at R17 and initally dipped nearly a percent weaker at R16.57 by 09:06. By 10:14 the share was trading at R16.68.

Similarly, Steinhoff's share price which started at 85c fell by 3.53% shortly after markets opened to trade at 82c by 09:07. By 10:14 it was trading 7% stronger at 91c.

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