IDC and DBSA shrug off one-notch downgrade rating from Moody’s
THE Industrial Development Corporation (IDC) and the Development Bank of Southern Africa (DBSA) — both vital to the success of the government’s New Growth Path strategy — are the latest casualties of SA’s sovereign downgrade by ratings agency Moody’s.
They are poised to massively expand their lending in line with a new mandate to provide more companies and public institutions with cheap finance, but will be likely to face higher costs in raising financial resources.
Both received a one-notch downgrade to Baa1 from A3, in line with Moody’s new sovereign rating.
The big banks yesterday shrugged off Moody’s decision to downgrade them as well, describing it as a nonevent that was unlikely to cause any short-term harm to their business.
Gert Gouws, chief financial officer of the IDC, yesterday downplayed the downgrade saying: “Lenders increasingly focus on the underlying strength of a borrower, rather than only considering its rating. We therefore believe that the IDC would have continued access to borrowings from domestic and international development finance institutions and banks.”
The IDC is relatively sheltered from the market as it has traditionally borrowed from multilateral institutions and had now tapped into various noncommercial sources of funding.
Although it recently launched a bond programme, the first R5bn bond will be taken up by the Public Investment Commission, the manager of government
pension and social funds.
The IDC is issuing bonds amounting to R4bn to the Unemployment Insurance Fund.
The DBSA said it did not expect the downgrade to affect it in “either the short or long term” as Moody’s decision was now in line with other ratings agencies.
Tshepo Ntsimane, head of the DBSA’s treasury, said the bank raises about 70% of its funding requirement from domestic bond markets and 30% from local and international commercial banks and international development financial institutions.
However, the borrowing profiles of both institutions are set to expand dramatically to meet the demands of the government’s New Growth Path strategy. The IDC is expected to more than double loans over five years and the DBSA reported a 23% expansion over three years.
Malcolm Charles, Investec’s fixed-income portfolio manager, said yesterday it was “a little bit liberal” to claim the IDC and DBSA would be unaffected by the Moody’s decision.
“Internationally, their bonds can be expected to become between 15 and 25 basis points more expensive. Compounded every year, that amounts to a significant amount,” Mr Charles said.
“While domestically it won’t make a difference to their spread, the base for everyone is now higher. They have borrowed quite conservatively before; now they have big plans as capital costs have become more expensive.”
Jason Lightfoot, portfolio manager at Futuregrowth Asset Management, said the financial implications of the downgrade were difficult to price.
“Given the fact that SA has a huge infrastructure programme which cannot all be funded locally, government institutions are going to have to tap into international markets. All bonds will price slightly higher off the back of the sovereign rating downgrade,” he said.
Moody’s downgraded SA’s national banks as well, as it normally does when it adjusts the country’s sovereign credit rating.
David Hodnett, Absa’s group financial director, said the downgrade was not expected to affect Absa, or other banks. A potential consequence of a downgrade was to increase the cost of raising funds offshore for large corporations, but this was not seen as an immediate concern in SA.
SA’s biggest five banks already have some of the best-capitalised balance sheets globally.
Mr Hodnett said the rating downgrade was expected following the country’s downgrade.
“Just to emphasise that, the standalone rating of Absa (that is excluding, for example, sovereign support) remained the same. We are not expecting the downgrade to impact Absa or the other banks as the vast majority of our funding and capital is raised locally,” Mr Hodnett said.
Michael Jordaan, CEO of First National Bank, said the downgrade would have “no impact as we are nearly fully locally funded”.
Peter Schlebusch, CE of personal and business banking at Standard Bank, said it was business as usual at SA’s largest listed banking group by market capitalisation.
“This rating downgrade has no impact on the day-to-day run- ning of (Standard Bank). Our focus will always be on providing for our customers’ financial needs,” he said.
Adrian Cloete, an equity analyst at Cadiz Asset Management, said the downgrade of the banks was simply a function of the recent Moody’s downgrade of SA’s government bond rating by one notch to Baa1.
“This should have very little impact, if any, on the South African banks’ funding rates as they are almost entirely funded with South African deposits and instruments,” Mr Cloete said.