Moody’s Investors Service (“Moody’s”) has today affirmed the B2 Corporate Family Rating (CFR) of Interswitch Limited (Interswitch). Moody has also affirmed the (P)B2 senior unsecured programme ratings of Interswitch Africa One Plc, a special purpose vehicle owned by Interswitch. The outlooks remain stable.
The action was prompted by the rating agency’s decision on 4 December 2019 to affirm the B2 rating for Government of Nigeria and change the outlook on the sovereign rating to negative from stable.
Recall : Moody’s Changes Nigeria’s Sovereign Ratings Outlook to Negative From Stable; Affirms The B2 Ratings – Dec 05, 2019
The affirmation of the B2 CFR reflects Interswitch’s (i) strong franchise that will benefit from positive secular shifts in Nigeria’s payment industry, (ii) strong market position and solid profitability, and (iii) solid liquidity profile, supported by good cash flow generation capacity. These strengths are balanced against (i) rising leverage as the company implements its expansion strategy, (ii) high operational, regulatory and technological risks, and (iii) high geographical, industry and customer concentrations.
The affirmed (P)B2 senior unsecured programme ratings reflect (i) the B2 CFR; and (ii) Moody’s Loss Given Default (LGD) for Speculative-Grade Companies analysis that takes into account Interswitch’s liability structure, which leads to the alignment of the senior unsecured programme ratings with the CFR.
The rating agency expects Interswitch to benefit from increasing usage of electronic and digital payment channels in Nigeria. Although less than 10% of total transactions in Nigeria are digital, ongoing high adoption of cards and alternative channels (electronic payments increased 32% in Nigeria in 2018) will support business generation for Interswitch, mitigating negative impact on financial performance during periods of economic slowdown. Moody’s expects Nigeria’s real GDP to grow at just above 2% over the next few years.
Moody’s expects Interswitch’s strong profitability to continue to provide good loss absorption capacity, with 2017-2019 average return on average managed assets of 18%. The company has demonstrated strong financial performance, with a 2017-2019 average net revenue growth of 17% and an average EBITDA margin of 40% over the same period.
The rating agency views positively Interswitch’s solid liquidity which is supported by strong cash flow generation. Moody’s expects the company to generate between NGN14-16 billion EBITDA in 2020 but the ratio of funds from operations to debt, which was 3.7x in 2019 will reduce to around 0.5x, due to its NGN30 billion bond programme.
In terms of credit challenges, Moody’s expects Interswitch’s leverage to rise, and its gross debt/EBITDA ratio to increase to about 2.2x over the next 12-24 months from a 2017-2019 average of lower than 1x. Similarly, Interswitch’s solid tangible common equity to total managed assets ratio of about 20% in 2019 will reduce to 8-10% in the next 12-18 months.
In its assessment, the rating agency has also considered Interswitch’s exposure to material operational, regulatory and technological risks. Given that its business relies on sophisticated software and computer systems, it is exposed to risks in case of system errors or defects, or virus attacks. It also faces risks related to data breaches and cyber-crime, which exposes it to risks of large fines and reputational damage. Moody’s also considered the concentration of Interswitch’s revenue to the banking sector and high client concentration risk as rating challenge.
While governance is highly relevant for financial service providers, Moody’s does not have any particular governance concerns for Interswitch. Nonetheless, corporate governance remains a key credit consideration and requires ongoing monitoring.
Rationale For Stable Outlook
Interswitch’s outlook is stable, reflecting Moody’s views that Interswitch business and financial performance will benefit from growing electronic transaction volumes and its strong market position, offsetting risks arising from its more leveraged balance sheet and Nigeria’s challenging economic environment.
Factors That Could Lead To An Upgrade/Downgrade
There is little potential for an upgrade given our expectation of rising leverage and the high concentration of Interswitch’s business in Nigeria.
Interswitch’s ratings could be downgraded in the event that (i) leverage rises beyond what is assumed by the CFR and the debt/EBITDA ratio increases substantially, negatively pressuring Interswitch’s capital position, (ii) its profitability, cash flow and liquidity positions weakens, constraining the company’s ability to meet its debt repayments on time.
Interswitch’s ratings could also be downgraded due to adverse changes to its debt capital structure that would lower the recovery rate for senior unsecured debt classes.
List Of Affected Ratings
Issuer: Interswitch Africa One Plc
….Senior Unsecured Medium-Term Note Program (Local and Foreign Currency), affirmed (P)B2
….NSR Senior Unsecured Medium-Term Note Program (Local and Foreign Currency), affirmed Aa3.ng
….Outlook remains Stable
Issuer: Interswitch Limited
….Long-term Corporate Family Rating, affirmed B2
….Outlook remains Stable