Nene rejects SAA’s change to Airbus deal
FINANCE Minister Nhlanhla Nene has rejected an application from SAA to renegotiate a planeleasing deal with Airbus Group after concluding the proposal would leave the carrier at risk of default.
SAA had been ordered to implement the previously approved transaction, the National Treasury said yesterday.
Any move by the stateowned airline to conclude a significant deal with Airbus or any other party without approval from the Treasury would constitute an “act of financial misconduct which could be grounds for sanctions against the board”, it said.
SAA, which is unprofitable and surviving off governmentbacked loans, renegotiated an order for 10 A320 aircraft earlier this year in favour of leasing five more modern A330 models. That would have reduced operating costs and released the airline from predelivery payment obligations to Airbus.
While Nene approved the swop in September, SAA chairwoman Dudu Myeni last month outlined an alternative plan under which SAA would buy the A330 planes and enter into a rand-denominated sale and lease-back transaction with a local leasing company.
SAA had failed to show that the proposed amendment to the deal structure would definitely leave it in a better financial position than it would have been under the original swop proposal, the Treasury said.
“The information indicated that the proposed transaction structure would actually leave SAA in a materially worse off financial position where it is unable to meet its commitments as they fall due,” it said.
Although there might have been benefits, “these were far outweighed by the high probability of a default on the government guarantees and the severe consequences thereof”, the Treasury said. – Bloomberg Annabel Bishop, the chief economist at Investec, said she anticipated that Fitch would downgrade South Africa’s longterm local currency sovereign rating and the country’s longterm foreign currency sovereign rating by one notch.
She said such a Fitch downgrade was mostly priced into the markets, with the rand weakness likely to be limited if the cut came, unless there were other drivers that could soften the rand exchange rate.
However, Bishop said if Fitch maintained a negative outlook, if it downgraded South Africa’s credit rating, or S&P changed its outlook for the local credit rating to negative, then the rand could depreciate materially.
Should the country lose its investment grade status, investors would worry more about the growing signs that South Africa was fast running out of fiscal space as economic growth remained stubbornly weak.
A junk rating would not only raise the country’s borrowing costs, but it would also force some investment funds that hold South African debt to begin liquidating their holdings, since their rules prevent them from holding noninvestment grade assets.
South Africa’s rating is constrained by the need to fund the sizeable current account deficit, which will probably average 4 percent of GDP this year. – Additional reporting by Bloomberg