"CRAB Ratings Corporate Credit Rating Report Venture Investment"
CRAB Ratings Corporate Credit Rating Report Venture Investment Partners Bangladesh Ltd. RATIONALE Rating Outstanding (5 November 2009) Long Term : ‘BBB2’ Credit Rating Agency of Bangladesh Validity : 30 June 2010 Limited (CRAB) has assigned ‘BBB2’ (Pronounced triple B two) rating in the Long Term to Venture Investment Analyst: Partners Bangladesh Ltd (hereafter referred to as VIPB or the Company) in Nur Elahee Molla view of the performance of the company Financial Analyst for the business year 2008 and other firstname.lastname@example.org relevant information. Financial Highlights Corporate entities rated BBB in the long BDT in Million term belong to ‘Adequate Capacity’ 2008 June 2009 cohort. Corporate entities rated BBB (Un-audited) have adequate capacity to meet financial Shareholders' equity 128.63 144.74 commitments but are more susceptible Long term liability 0.54 2.78 to adverse economic conditions due to Total current liabilities 8.62 49.47 changing circumstances and are also Total fixed assets 91.26 69.53 subject to moderate credit risk. Total assets 137.80 196.99 Operating income 15.52 9.72 Operating profit 4.86 2.35 CRAB has performed the present rating Net profit after tax 2.47 1.11 assignment based on audited financial Operating profit margin 31.30% 24.16% statements of 31 December 2008 and Net profit margin 15.95% 11.44% other relevant information. The rating ROA 1.80% 0.56% also takes into account business profile, ROE 1.92% 0.77% business model, the past record and Debt to asset ratio 6.65% 26.52% trend of operating performance (upto June 2009) and balance sheet strength of the Company. Exhibit: Revenue Collection Pattern VIPB was incorporated as a public limited 2.50 company with an objective to promote the growth and development of A m o u n t i n M illio n B D T 2.00 1.50 strategically important sector of national development, i.e., Small & Medium 1.00 Enterprises (SME). In excess to financing 0.50 the SMEs, the Company has a plan to 0.00 Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- provide technical assistance and total 08 08 08 08 08 08 09 09 09 09 09 09 business solution in the future. The Expected revenue Actural revnue Company was set up as joint-venture between foreign investors (NRB) from US Page 1 of 3 CRAB Ratings Corporate and institutional sponsors from Bangladesh. The Company obtained No Objection Certificate from Bangladesh Bank to be registered in Bangladesh as Company under the conditions – (i) VIPB can’t conduct ‘Finance Business’ defined in Bank Company Act, 1991 and The Financial Institutions Act 1993 ; (ii) The investment of Non-residential Entrepreneurs has to be complied with the existing Foreign Currency Act. The rating considers the entrepreneurial strength of the Company especially the sponsorship of the banking institutions. The Company was incorporated with an initial authorized capital and paid up capital of BDT 300.0 million and BDT 125.0 million respectively as on 31 December 2008. Foreign sponsors (NRB) contributed 40% of the capital and the remaining 60% capital was infused by local companies. VIPB launched the operation with a unique model that is developed with the concept of low cost outsourcing of market search and oversight activities targeting SME entrepreneurs having lack of access to Microfinance Institutions and Banks or other financial institutions. The execution of outsourcing services depending on three Master Service Providers (MSPs) and trained Local Service Providers (LSPs) are taken into consideration while rating although the agreements restrict the MSPs from selling any financial product that is similar to products provided by VIPB which will eventually minimize the risk. The ultimate investment decision is done by the investment team based on set procedure and criteria. The Board takes investment decisions that fall beyond the discretionary power of the investment team (Upto BDT 1.50 million). The monitoring activities are done by both the Local Service Providers (LSPs) and the Head Office. The commission of LSPs is paid depending on the collection of revenue which will eventually strengthen monitoring system as well as ensure revenue stream. VIPB executed its first investment in March 2008 under the developed model and 150 investments amounting BDT 113.25 million in the same year. Upto June 2009, the Company had 246 investments amounting BDT 181.25 million. As per information provided by VIPB, the year-end collection rate for 2008 was 87.75% considering investment amount and 90.47% considering revenue amount. The monthly revenue was receivable ranged from 16% to 57% from April 2008 to June 2009 registering an average rate of 32% although most of the accounts receivable was in cheque in the process of collection. The Company has two investments whose payments were due for more than four months. However the accounts receivable and number of bad investment may increase with the increase of operation of the Company which will eventually enhance risk in the upcoming years. Presently the Company is keeping 1 percent provision for quasi- equity investment on outstanding amount although it has no classification procedure or criteria and specification regarding the termination of investment regarding default in payment. Diversification of investment in 8 sectors and 16 districts was also considered while rating the Company. The investment was also diversified in number of investment and size of the investment. Venture capital investment is considered as a risky investment for its inherent characteristics. Presently the Company keeps its business risk at comparatively low level by highly concentrating on fixed revenue arrangement, although it has other products; equity investment and quasi-equity investment where investment is collected as a combination of fixed revenue and revenue sharing characteristics. However the expected increase in the equity investment in the upcoming year and increasing trend in Page 2 of 3 CRAB Ratings Corporate financial leverage may result in increasing risk for the Company and slow down the profit margin for immediate year. Although the present diversification of investment in terms of size minimizing the concentration risk that may subsequently decrease with the increasing investment size in the upcoming year. In 2007, the operating income (BDT 5.11 million) of VIPB was only in the form of interest on FDR as there was no disbursement as investment upto March 2008. The Operating income and profit of the Company stood at BDT 15.52 million and BDT 4.86 million respectively in 2008 registering an operating profit margin of 31.30%. The earnings were 1.80% of average assets and 1.92% of average equity in 2008. Although the debt ratio was very low (6.65%) in 2008 it became 26.52% which may further increase in the upcoming year with the increase of operation. The rating also takes into account the ownership structure, profile of the Board members, Board’s effectiveness, and business strategy of the Company. Although the process of date and information management are comparatively timely and useful throughout the entire company VIPB is yet to develop integrated software to cope with the development of the business. It is understood from the management that the Company has a plan to install integrated software to enhance the monitoring and control system. The rating also considered the vision and objectives of the Company, experience of the top management, training arrangements, presence in different geographical areas and marketing strategy as well as competitive advantage in the marketplace to identify its growth potential. Page 3 of 3