Business Day

Moody’s to re­view state en­ti­ties

Agency warns it could cut grades for Eskom, San­ral, IDC, DBSA

- CAROL PA­TON, ANDISWA MAQUTU AND PENNY MASHEGO Business · South Africa Politics · South Africa News · Finance · White-collar Crime · Investing · African Politics · Politics · Crime · African National Congress · South African National Roads Agency · Eskom · Transnet · South Africa · Gauteng · Pravin Gordhan · Cyril Ramaphosa · International Data Corporation · R3

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.

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