Interswitch Limited, a Nigerian integrated payment and transaction processing company, on Monday was assigned a B2 corporate family rating by Moody’s on the back of improvements in the company’s fundamentals and positive industry prospects.
The rating is on par with Nigeria’s sovereign rating (B2 stable) and reflects the inter-linkage between Interswitch’s main clients, Nigerian banks and Nigeria, and the fact that most of Interswitch’s revenue is generated in the country.
Rating agencies, like Moody’s, assesses the financial strength of corporate and governmental entities to meet their obligations. This means they determine the credit risk of bond issuers especially their ability to pay back principal and interest.
Moody’s on Monday also assigned senior unsecured programme ratings of B2 (provisional rating) and Aa3.ng national scale programme ratings to Interswitch Africa One Plc’s NGN30 billion programme; Interswitch Africa One Plc’s is a special purpose vehicle owned by Interswitch.
The rating agency says the issuer outlook is stable on expectations that its business and profitability will benefit from growing electronic transaction volumes, offsetting risks arising from a more leveraged balance sheet.
A B2 is a Speculative Grade Credit Quality and debt instruments in this category may lack sufficient margins of protection such as structural or legal protections necessary to ensure a timely repayment.
On the other hand, an Aa3 means issuers (or supporting institutions) are rated as Prime-1 and such obligor has a very strong capacity to meet its financial commitments. It is only three ratings lower than Aaa, the highest-rated. Aa3.ng means Interswitch is very strong relative to Nigeria’s rating.
Interswitch’s rating comes amid possible plans by the company to tap into the debt market in an expansion bid.
Last week, Interswitch announced that through the incorporation of Interswitch Africa One PLC, it registered a debt issuance programme with the Securities and Exchange Commission of Nigeria (SEC) to explore strategic options for its business, which may include the possibility of issuing debt securities to institutional investors and the general public.
As part of the registration process, Interswitch was assigned an “Aa” (stable) ratings by Agusto & Co., another international rating agency.
For Moody’s the assigned Provisional rating of B2 senior unsecured programme ratings reflects positive secular industry shifts that will support Interswitch’s business, the firm’s strong market position and solid profitability, and its solid liquidity profile, supported by good cash flow generation capacity.
Although less than 10 percent of total transactions in Nigeria, the increasing use of electronic and digital payment channels supported Moody’s view; Moody’s believes the trend would support business generation and sustain the financial performance of Interswitch, with about 90 percent share of the electronic payment market, in periods of an economic slowdown.
Moody’s says it expects Interswitch’s profitability to soften given that higher interest cost for the upcoming bond issuance will consume a meaningful portion of its earnings but notes that the company’s solid liquidity is supported by strong cash flow generation.
The rating agency, however, balances Interswitch strengths against rising leverage as the company implements its expansion strategy, high operational, regulatory and technological risks, and a high geographical, industry and customer concentrations.
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