Moody's downgraded Imperial in December last year, citing the difficult trading environment in which the group operated. Last week its credit opinion, which was neither a rating action nor a rating affirmation, raised the prospects of another downgrade.
Analyst Rosa Ferreira said the ratings agency was concerned that Imperial was generally not generating free cash flow to reduce leverage. But she acknowledged that Imperial still had committed bank facilities and substantial cash positions at year-end.
In her research report, Ferreira said the reduction in operating cash flows would cause Imperial to use available liquidity — either in the form of using its cash reserves, or raising debt to fund operational expenses and capital expenditure — thereby increasing net leverage.
She said the group's leverage typically increased annually rather than decreased, although Moody's recognised that Imperial had used the proceeds from recent asset disposals to reduce leverage.
Imperial has disposed of its aviation division and interest in Tourvest, while unbundling its aviation and leasing businesses. But Ferreira said Moody's believed the expectation of difficult medium-term trading conditions outweighed the offset of applying asset disposal proceeds to debt reduction.
This was already evident from the contraction in new car sales by up to 30% year on year, which meant that car sales and the performance of Imperial's ancillary businesses would be lower. Returns on insurance assets, Ferreira said, could also be lower if equity markets remained volatile.
Ferreira said lower vehicle sales volumes would result in less cash flow to service Imperial's cost base, which was likely to place pressure on Imperial's operating and financial performance. She expected further weakness in Imperial's operating performance and lower operating margins.
Operating margins, she said, were likely to be reduced by a weak economy, job losses and reductions in capital expenditure throughout the industries in which Imperial operated. This could hurt Imperial's logistics division and its vehicle-related units, including dealerships, distributorships and insurance.
In December, Moody's downgraded the long-term issuer rating of Imperial to Baa3 from Baa2 and maintained its negative outlook. It also downgraded Imperial's long term national scale issuer ratings and senior unsecured issue ratings to A3.za from A1.za. It said Imperial remained exposed to the consumer cycle despite its recent restructuring, which had significantly reduced the company's net debt.
Ferreira said she expected Imperial's ratings to return to stable if, among others, the recent deterioration in operating margins reversed and debt protection levels increased.
Source: Business Day
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