e-spaces

Fitch was ”concerned” customer bad debts at Woolworths had deteriorated further in the three months to February, the ratings agency said yesterday, but nevertheless it affirmed the retailer’s credit rating.

April 18, 2008

By Tom Robbins

Cape Town – Fitch was ”concerned” customer bad debts at Woolworths had deteriorated further in the three months to February, the ratings agency said yesterday, but nevertheless it affirmed the retailer’s credit rating.

This suggests a tale of two account holders, with very little middle ground. Financially stressed customers are up to their eyeballs in debt, but the majority are proving to be resilient payers in the high interest rate environment.

On Wednesday, the retailer sold a controlling stake in its consumer finance business to Absa for R875 million, in which Absa would fund 84 percent of the current debtors book to a value of R4.71 billion, leaving Woolworths with debt of only R275 million.

Fitch said average bad debts, or charge-offs, in the three months to February, rose to 9.64 percent of the gross book.

This is higher than the December bad debts of 7.8 percent Woolworths reported in its half-year results.

“Fitch is concerned with the level of charge-offs which have deteriorated over the past 12 months,” said the agency.

Fitch’s base case for the quarter to February was 7.7 percent. Grant England, the agency’s director of European Structured Finance, said a base case was “assuming [in March 2007] that all things in the consumer economy would remain equal”.

But since then both interest rates and inflation have continued to rise, making it more difficult for consumers to service and repay debt.

The comments came as Citigroup said Absa was overpaying for the acquisition.

”The price paid does not take appropriate cognisance of how stretched consumers’ balance sheets are,” said Henry Hall, a Citigroup analyst based in Johannesburg. ”Woolworths was desperate for a deal and Absa should have done better for shareholders.”

Fitch affirmed Woolworths’ Class A notes credit rating of AAA, and Class B notes at AA minus. AAA for the local market is the top rating given. Moody’s also affirmed the retailer’s credit rating of A3 yesterday.

Moody’s said it expected the retailer’s “strong brand, strategies and market position will limit further declines in operating margins”.

Retail operating margins had fallen from 8.7 percent in the year to December 2006 to 7.6 percent in the year to December, but Moody’s expected margins to at least remain consistent.

Moody’s said Woolworths should have adequate banking facilities to fund operations and new store openings. It had realised its core skills lay in retailing, leaving the management of the credit book to Absa, said Moody’s.