Moody’s Investors Service, (“Moody’s”) has downgraded Interswitch Limited’s (Interswitch) corporate family rating (CFR) to B3 from B2. Moody’s has also downgraded the senior unsecured medium-term note programme ratings of Interswitch Africa One Plc, a special purpose vehicle owned by Interswitch, to (P)B3 from (P)B2 and its national scale senior unsecured medium-term note programme ratings to A3.ng from Aa3.ng. The outlook remains stable for both entities.
Today’s rating action reflects Moody’s view of (1) increasing industry risks that exposes industry players including Interswitch to operational and cyber risks; and (2) concerns about corporate behaviour, risk management and the limited and delayed public disclosures of its performance and financial accounts, which make it more difficult for market participants to assess the company’s financial position and future prospects amidst ongoing macro-economic challenges and evolving regulation.
Interswitch is a payment services company based in Nigeria. The company operates through three main business segments: transaction processing and enablement that handles switching and processing services; card networks via its Verve card scheme; and consumer financial services.
The downgrade of the CFR captures Moody’s view that Interswitch is faced with rising industry risks due to evolving regulations in the financial services and payment processing service sectors, the rating agency’s expectations of higher level of competition and the industry’s continuous technological changes. The broader payments industry remains susceptible to heightened event risks, which exposes the industry players to operational, regulatory, technological and cyber risks, ultimately translating into potential financial losses. Competition will increase as both new fintech companies and some of Nigeria’s leading banking groups are also investing in their own capabilities to handle and process electronic transactions and payments. As such, the rating agency has adjusted its ‘Industry risk’ score to B from Ba to capture related tail risks that are not always visible or measurable in a timely fashion.
Today’s rating action also captures Moody’s concerns around corporate behavior, risk management and the limited financial and operational information that is available in the public domain. More specifically, Interswitch has released its March 2020 accounts with a significant delay while additional business updates are scarce and not in the public domain, given that Interswitch is a private company, making it difficult for the general investing public to assess its financial performance. The rating agency also notes that the recent strong growth of Interswitch’s balance sheet, which expanded 2.1x in the 2016-20 period, has heightened the company’s operational risks and could lead to unexpected losses in the future.
The (P)B3 senior unsecured programme ratings downgrade reflect (i) Interswitch’s B3 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 stable outlook captures the rating agency’s view that the current ratings adequately capture rising industry risks that can lead to increased volatility in its financial performance.
The stable outlook also recognises the favourable market trends from growing electronic transaction volumes, Interswitch’s strong market position and its currently favourable liquidity position.
Factors That Could Lead To An Upgrade Or Downgrade Of The Ratings
Interswitch’s ratings could be upgraded if operating conditions improve and the entity is able to maintain a resilient financial performance and demonstrate its ability to navigate through rising industry risks. In addition, Interswitch will need to demonstrate that it is effectively addressing any risk management challenges.
Interswitch’s ratings could be downgraded in the event that its financial performance deteriorates, particularly if profitability reduces or becomes more volatile, straining the company’s capital buffers, cashflow and liquidity, or if the entity is faced with operational and risk management-related issues that lead to large financial losses or reputational damage.
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 Limited
….Long-term Corporate Family Rating, Downgraded to B3 from B2
….Outlook, Remains Stable
..Issuer: Interswitch Africa One Plc
….Senior Unsecured Medium-Term Note Program, Downgraded to (P)B3 from (P)B2
….NSR Senior Unsecured Medium-Term Note Program, Downgraded to A3.ng from Aa3.ng
….Outlook, Remains Stable