2019

Integrated Annual Report

MARK
HERSKOVITS

EXECUTIVE DIRECTOR: CAPITAL MANAGEMENT

The group's capital management strategy remains conservative and appropriate for the current economic conditions. At holding company level, our balance sheet is strong and debt free with undeployed capital of R950 million, providing ample capacity to fund organic and acquisitive growth.

GROUP PERFORMANCE

The group's capital management strategy remains conservative and appropriate for the current economic conditions. At holding company level, our balance sheet is strong and debt free with undeployed capital of R950 million, providing ample capacity to fund organic and acquisitive growth.

The group's financial position was supported by both SA Taxi and TCRS meeting their respective return targets in the year. SA Taxi achieved core return on equity of 24.6% against a medium-term target of 25%. TCRS achieved return on assets of 8.1% against a target of 8% over the medium term, which is a more appropriate measure of return for the division.

OPTIMISING OUR CAPITAL STRUCTURE

Our capital adequacy targets are set according to our internal stress risk models, credit rating requirements and loan covenants. Underpinned by our strong ratings and reputation in the equity capital markets, the group has favourable access to equity capital from our well-managed and supportive shareholder base.

Our capital management strategy informs our efforts to access and deploy capital optimally and efficiently in funding our operations and growth initiatives.

  OUR FUNDING PHILOSOPHY      
       
 
INNOVATIVE THINKING

Innovative thinking is encouraged and cultivated to develop pioneering funding solutions.

   

To support an optimal capital structure, we set specific targets appropriate to each division:

  SA TAXI  
   
 

We target equity (tier 1 capital) of between 18% – 20% and debt (tier 2 capital) of between 2.5% – 7.5%.

The ownership transaction with SANTACO enabled SA Taxi to settle approximately R1.0 billion of interestbearing debt, improving the division's capital adequacy ratio to 22.4% (2018: 20.5%) and rebalancing tier 1 and 2 capital to within our target range.

  For more detail on the financial effects of the ownership transaction between SA Taxi and SANTACO, see the CFO's report.
 
  TCRS SOUTH AFRICA  
   
 

We target 40% equity and 60% debt in the acquisition of NPL portfolios as principal.

TCRS's capital structure is managed according to the proportion of equity and the type of debt used, rather than a pure capital adequacy model, to ensure appropriate leverage across the NPL portfolio.

 
  TCRS AUSTRALIA  
   
 

We target 50% equity and 50% debt in the acquisition of NPL portfolios as principal.

 
 
ENGAGED DEBT INVESTORS
  • Recurring investment by debt investors motivated by performance, the ease of transacting and appropriate risk-adjusted returns.
  • Transparent and direct relationships with debt investors, facilitated by valued intermediaries where necessary.
   
 
JUDICIOUS RISK MITIGATION
  • Optimal liquidity management between asset and liability cash flows.
  • Effective management of interest rate, currency and roll-over risk.
  • Controlled exposure to short-term instruments.
  • Diversification by geography, capital pool, debt investor and funding mandate.
   
 
OPTIMAL CAPITAL STRUCTURES
  • Proactively managing valuable capital and funds raised across the group.
  • Bespoke and innovative funding structures to meet the investment requirements and risk appetite of a range of debt investors, while also targeting an optimal weighted average cost of capital.
  • No cross-collateralisation between structures.
   
COST OF BORROWING (%)

ACCESS TO CAPITAL

The group's capital adequacy strengthened to 29.9%, from 28.3% in the prior year, comprising 26.7% equity and 3.2% subordinated debt. SA Taxi is well capitalised for growth, and no further equity capital will be required from its shareholders for the foreseeable future for organic growth. The group also has sufficient undeployed equity capital on its balance sheet to fund TCRS's planned strategic organic growth initiatives.

A feature of South African capital markets is the demand for quality corporate paper and spreads. This favours the group in raising local funding at competitive rates, based on the proven performance and resilience of our portfolios. The group's track record for quality earnings growth has been rewarded with improved ratings over time, which has assisted in lowering our cost of funding. In the 2019 financial year, the group's average cost of borrowing reduced to 11.1%, from 11.5% in the prior year, and we achieved a margin above average repo rate of 4.4%.

The group’s strong balance sheet and access to substantial funds gives us the flexibility to apply the most appropriate funding solutions to the needs of each business, across the spectrum of equity or debt capital. Our good standing among debt capital providers enabled us to raise R8.2 billion in debt facilities from 38 funding transactions across the group during the year.

SA Taxi raised R5.5 billion in debt facilities, securing its funding requirements for the 2020 financial year. Its funding mix balances the cost of debt against the benefit of longer duration debt facilities from a diversified base of 36 distinct local and international debt investors. The demand for SA Taxi’s debt issuances has remained strong, supporting favourable pricing. SA Taxi issued R1.7 billion of Moody’s credit rated and JSE-listed debt via its Transsec 4 securitisation programme, priced at a weighted average cost of 173 basis points above three-month JIBAR. These were the lowest priced Transsec issuances to date.

The capital management team has also continued to optimise SA Taxi’s mix of local and international funding. Most of SA Taxi’s international funders are DFIs, which are less sensitive to market risk and unlikely to materially change their investment focus in the event that South Africa’s sovereign credit falls below investment grade. As these loans are generally of a longer tenure, they give us the flexibility to draw down on facilities over extended periods. However, this funding is inevitably more expensive, mainly because it is fully hedged into ZAR as the group does not accept exchange rate risk, which adds significant hedging costs to the cost of international funding. Currently, international debt forms 24% of SA Taxi’s funding mix. We are working to grow the proportion of cheaper local funding, including attracting local DFI funding, to reduce SA Taxi’s funding costs over time.      

We restructured TCRS’s funding arrangements in the last year to support its increased capital requirements. The new structure incorporates all entities within TCRS South Africa and is easier to manage and simpler for our funders to understand. From a treasury management perspective, it gives us more flexibility as capital that was previously ringfenced for specific entities can now be transferred across TCRS for deployment. Managing TCRS’s debt centrally also generates substantial interest savings.

In total, facilities of R2.4 billion are available to TCRS. Most of the group’s undeployed capital was allocated to TCRS; this is available on demand and backed by these new facilities. This optimised capital management structure has reduced TCRS’s funding costs and will maximise returns on capital for Transaction Capital and our shareholders.

Looking ahead, the capital management team will continue to assess the full spectrum of possibilities at our disposal and put multiple contingency plans in place, approaching capital providers as required

      OVERVIEW OF THE GROUP’S DEBT FUNDING CHANNELS BY EXPOSURE IN 2019      
           
ON BALANCE SHEET     SECURITISATION     STRUCTURED FINANCE     WAREHOUSING FACILITIES

R3.5 billion

   

R1.9 billion

   

R4.0 billion

   

R1.4 billion

ALLOCATION OF CAPITAL

Most of the undeployed capital on the group's balance sheet has been allocated to our strategic organic growth initiatives, as follows:

After funding these strategic growth initiatives, we expect the group to have around R250 million of undeployed capital. This will be available to fund acquisitive growth, specifically bolt-on acquisitions that meet the group's acquisition criteria and support the strategic growth initiatives of the divisions.

Capital deployment will be assessed on a project-by-project basis, according to our hurdle rate of returns above the weighted average cost of capital. This will ensure that the group's investment of capital continues to generate value for our shareholders.

GOVERNANCE OF CAPITAL

The asset and liability committee sets and oversees well-defined policies and risk tolerances across funding, structural and market liquidity risk, interest rate risk, currency risk and counterparty credit risk. Managing these risks is a core competency for the group, with dedicated specialist skills in our capital management team and in our operations.

  For detail on Transaction Capital's comprehensive risk management approach, as well as detail on funding and capital risk, see the Risk report.

The effective management of the group's capital risk supports our access to debt capital and enables us to be discerning in the type of debt we access. This is fundamental to our strategic flexibility and our financial performance. In turn, the group's performance is key to the credibility of our investment proposition, with a range of debt investors giving us some latitude in targeting an optimal weighted average cost of capital.

With our track record for sustainable quality earnings growth, strong balance sheet and exciting growth prospects, we are in a strong position to optimise our access to, and our allocation and utilisation of, capital over the medium term, in line with our capital management approach.

POSITIVE LIQUIDITY MISMATCH (Rm)