Moody’s to review state entities
Agency warns it could cut grades for Eskom, Sanral, IDC, DBSA
CREDIT ratings agency Moody’s has warned that it could cut the investment grades of South African National Roads Agency (Sanral), the Industrial Development Corporation (IDC), the Development Bank of Southern Africa (DBSA) and the Land Bank imminently, after it placed them on immediate review for a downgrade on Wednesday.
It has also warned that some of Eskom’s debt instruments that are already subinvestment grade could be downgraded even further into junk territory.
The sudden and dramatic action by Moody’s indicates significantly heightened investor concerns over state-owned com- panies, several of which have been tainted by governance and corruption concerns.
Moody’s says its primary concern is to assess whether the companies will continue to have access to the debt market in future and whether they could absorb higher funding costs.
It follows the decision by specialist asset manager Futuregrowth two weeks ago to pull the plug on new loans to the five entities, citing governance concerns. Transnet, the sixth entity over which Futuregrowth raised concerns, is not affected and has not been placed on review.
Several other investors have also gone on record to say they have gone underweight in SA state-owned enterprise bonds.
In its statement, Moody’s said that the move was due to “increased risk of funding and liquidity challenges, following some signals of risk aversion by funding counterparts” owing to governance concerns.
In the case of the three lending institutions — the IDC, Land Bank and DBSA — Moody’s said it noted their weakening financial performances.
While no specific governance shortcomings had come to its attention, the likelihood that markets would price in additional downside risks posed the “risk of increased funding costs, shorter duration of liabilities and increased maturity mismatches.”
The three face a downgrade from their current Baa2 foreigncurrency long-term debt (which is the same as the sovereign) to one notch above junk.
In the case of Eskom, Moody’s said the review was warranted as Eskom faced “rising funding challenges in the context of an adverse regulatory framework and an evolving political environment”.
In August, a court ruled that the tariff increase granted to Eskom for 2016 by the National Energy Regulator of South Africa (Nersa) should be set aside, creating uncertainty over Eskom’s revenue streams. Nersa is appealing against the ruling.
Eskom was also likely to see rising debt levels as it was yet to implement cost-reflective tariffs. This, together with governance concerns and investigations by the Treasury into certain coal contracts, were additional reasons for the review.
Eskom chief financial officer Anoj Singh said that the review was “unfortunate given the progress made towards improving the company’s financial profile, successful implementation of the operations turnaround plan and Eskom’s healthy liquidity position”.
In the case of Eskom, only its unguaranteed notes are under review. These are currently rated by Moody’s at Ba1, which is already subinvestment grade. Moody’s said the review of Sanral reflected ongoing cash flow pressure faced by Sanral despite government interventions to increase e-toll collections from
Move due to increased risk of funding and liquidity challenges
Gauteng motorists. Moody’s said road users had barely taken up Sanral’s six-month 60% discount period to settle historic e-toll debt. Sanral managed to raise only R76m per month from July 2015 to August 2016, compared to R86m per month the previous year.
“While Sanral issued summonses to defaulting road users, some are preparing to defend their cases in court further delaying debt collection. Therefore, Moody’s expects Sanral’s cash-flow pressures to persist in 2017,” the rating agency said.
It said Sanral had more than R3.7bn in debt maturing in 2017 that it planned to roll over. The ratings agency said Sanral had R7.4bn in cash and cash investment that it could use to pay off its maturing debt, but this would “deplete its liquidity buffer”.
“During the review period, Moody’s will assess the company’s ability to raise new funding,” Moody’s said.
The Treasury’s spokeswoman Yolisa Tyantsi said Finance Minister Pravin Gordhan, Deputy President Cyril Ramaphosa and other stakeholders would meet Moody’s next week. “The purpose is to reassure the … agency that the government has made progress on governance and financial matters of SOCs [state-owned companies],” she said.
Appearing in Parliament on Wednesday, Transnet CEO Siyabonga Gama said Transnet was preparing a statement of claim for damages it had suffered as a result of Futuregrowth’s actions.
Gama said Transnet had not received notice from Moody’s that is was under review as the company had a strong financial and liquidity position.
“Our fundamentals are strong,” the Transnet CEO said.