Eskom rated all the way down, but firms with offshore exposure fare better
Friday night’s downgrade by Moody’s of SA’s sovereign-credit rating has been followed by a stream of rating actions on all of the other entities that the agency rates in SA – from public sector entities such as state-owned companies or cities to private-sector firms that include banks, insurers and other companies.
Anyone wanting to raise debt in the markets needs a rating, and, just as it does for a country, the rating influences the cost at which a company can fund itself. So ratings actions matter. And there are striking trends that emerge from the latest round.
One is just how bad Eskom’s financial state is, in the eyes of the credit analysts. It was already well into junk territory, but has been given a doublenotch downgrade by Moody’s, to Ba2/Ba3 (depending on which instruments are being rated) – despite the support it has from government. By contrast, Transnet, with its strong cash flows, has simply been downgraded in line with the sovereign, to Baa3 – which is still investment grade, though only just, and like SA itself, Transnet has a negative outlook. SA’s big banks, too, have been downgraded in line with the sovereign rating. That’s typical practice internationally because banks are so exposed to SA’s own fortunes, and in SA’s case they have to hold substantial amounts of government paper to meet their liquid asset requirements – direct exposure to the sovereign rating.
One of the problems for a ratings agency when it downgrades a country to the edge of investment grade, as in SA’s case, is that this results in what the credit analysts call “compression” of the ratings. At peak, SA was “A” rated on the Moody’s scale, and that allowed plenty of scope for the agency to give companies ratings that were lower – but still investment grade. But the Baa3 rating that SA now has, after Friday night’s downgrade, serves as a constraint to the corporate ratings – companies generally can’t go above the country ceiling because the country risk is also their risk. Hence the stream of ratings actions since Friday.
But the companies that Moody’s rates haven’t just all followed the sovereign down, and a key trend is that some of those companies that have diversified internationally and have substantial offshore cashflows have been “delinked”, in the language of Moody’s credit analysts, from SA’s own rating, with ratings that are better than SA’s.
No one is higher than Baa3, and while nine companies were already there, others have been downgraded to that level. But when it comes to the ratings outlook, there are exceptions to the “negative” on SA. Naspers for example, with its huge exposure to A-rated Chinese group Tencent, has had its “stable” outlook affirmed. So too has Frankfurtbased Steinhoff, which now earns only a quarter of its profit in SA. And AngloGold Ashanti, with dollar revenues and offshore funding, is on “positive” outlook. Their ratings aren’t really constrained by the SA sovereign, as Moody’s sees it.
Conversely Bidvest, which now that it has unbundled its international food services businesses and is a pure SA player, has been downgraded to Baa3 with negative outlook. And Barloworld, with its exposure to both sub-Saharan Africa and to junk-rated Russia, has been affirmed at Baa3 negative.
Those are the global ratings. However, Moody’s also has national scale ratings that compare companies within the country on their relative credit strengths. And while the country’s credit worthiness may be rapidly weakening, it continues to house an impressive number of large companies with strong management and strong financial metrics. One trend that jumps out of the list of Moody’s ratings actions, says Rand Merchant Bank analyst Elena Ilkova, is how many companies have had upgrades to their national-scale ratings.
Steinhoff is again on the list, with its national-scale rating raised to Aa1 — a level it shares with companies such as Imperial and Barloworld.
But for anyone who imagined that internationalising was necessarily the route to ratings riches, it’s worth noting that MTN was on Moody’s list of double-notch downgrades.