- Moody’s sceptical on BDC credit profile
- BDC managed assets almost at P4 billion
- Gov’t backing saves BDC from a downgrade
- BDC in risky investment model
Corruption scandals that previously rocked government investment arm, Botswana Development Corporation (BDC) have dented the company’s credit record and have earned the corporation a lower Moody’s rating.
BDC was rated at a standalone credit profile of b1, according to Moody’s Investor Service Credit Opinion on BDC, dated November 14, 2018. Moody’s said that the standalone b1 credit profile balances the company’s strong solvency and liquidity position against its high concentration in a small number of large equity investments and legacy issues.
In 2012 BDC was found by the High Court to have flouted tender regulations and its own rules in the awarding of some tenders for the P350 million Botswana Innovation Hub. Justice J. Lesetedi found that BDC breached its own tender rules to sidestep other companies, namely Mmile Mhutsiwa & Associates, and David Langdon while it acted swiftly in favour of their rival, The Fitzwilliam’s Partnerships.
A Forensic Audit report, which was widely publicized at around the same time, revealed details on how corruption in the Fengyue Glass Project in Palapye may have leaked close to P100 million into the wrong pockets. The project which was valued at over P500 million has since become a white elephant after the funds were squandered.
While a forensic report mentioned specific names, government chose not to prosecute anyone. BDC has funded several other projects which were also steeped in controversy, while some collapsed like Golden Fruit Manufacturing Plant in Boatle. The BDC funded Delta Diaries, also collapsed and was bought by retail group Sefalana for a song.
Moody’s also found BDC to have used risky investment models which over exposed the company to losses by concentrating most of its investments in a few large companies.
BDC’s investment model has always been to issue financial support in return for equity, and eventually exit the company after it stabilises and is profitable, with the expressed intention of leaving such companies in the hands of Batswana. While it has done so in a few instances, BDC continues to hold on tight to three companies, namely Sechaba Breweries Holdings (a holding company to beer brewer Kgalagadi Breweries Limited (KBL), hospitality outfit Cresta Marakanelo Group and property firm Letlole La Rona (LLR) because the companies, both listed on Botswana Stock Exchange (BSE) are strategic to BDC and are the company’s cash cow.
To date, BDC has lost over P500 million in Sechaba, after the company’s stock and market capitalisation crumbled, driven by the losses associated with the regulatory environment. Sechaba was valued at almost P5 billion, which eroded to around P2 billion, taking down shareholder value with it. BDC has a 24 percent stake in Sechaba and consequently lost shareholder value.
Credit rating agency, Moody’s said the outlook on the Baa2 long-term issuer ratings on government investment arm, Botswana Development Corporation is stable and captures both the stable outlook on the sovereign rating of Botswana and the Firm’s expectation that BDC’s financial metrics, specifically the company’s capital and liquidity buffers will remain solid. Moody’s said the ratings are underpinned by the company’s strong liquidity and capital buffers, and also an assumption of a high probability that government will bankroll BDC, should a need arise.
“Our assumption of a high probability support underpins the issuer ratings. BDC’s solvency, funding and liquidity position will remain strong despite a gradual weakening as BDC deploys new growth strategy,” Moody’s said. BDC’s new strategy which is aimed at funding projects worth P30 million and above means they will have to spend more money, thus weakening its fiscal position.
Moody’s said positive rating pressure will be exerted on BDC’s b1 stand alone credit profile if BDC successfully executes its new strategy including a re-balancing of the portfolio and a reduction of associated investment concentration leading to a more resilient earning profile and improved asset quality profile while maintaining a strong capital buffer. An upgrade of Botswana’s A2 sovereign credit rating could also positively affect BDC, but a downgrade will also lead to a downgrade of BDC’s issuer ratings.
“Negative pressure could also develop if BDC significantly increases its leverage, reduces its capital metrics beyond our current expectations and fails to improve its investments performance track record, which will in turn weigh on its asset quality and profitability,” said the agency. BDC’s managed assets are currently valued at P3.9 billion as at the end of 2017, having grown from P3.1 billion in 2013. Sechaba, Letlole and Cresta account for the majority of those assets.