Moody’s barking up the wrong tree
Ratings agency’s SOE targets are a bizarre mix
JUST when I thought I finally understood how ratings agencies work, along came this week’s decision by Moody’s to place five state-owned entities on immediate review.
Moody’s rationale for placing on immediate review for downgrade the ratings of Eskom, the South African National Roads Agency, the Industrial Development Corporation (IDC), the Development Bank of Southern Africa (DBSA) and the Land Bank caught me by surprise.
Even though those demigods we call analysts say we shouldn’t be at all surprised because our country is hopeless, I think the decision and more importantly the rationale — while justified for some SOEs — lacks credibility for others.
I cannot blame Moody’s for saying it is concerned about Sanral’s “continuing deterioration of the Gauteng Freeway Improvement Project cash flows and rising funding challenges at a time when [it] faces large debt maturities”.
The world’s largest ratings agency’s clearly articulated its rationale: “Sanral’s rating review reflects ongoing cash flows pressure, despite a number of interventions by the national government to encourage e-toll payments. Road users barely utilised the opportunity to clear their outstanding debt during a recent sixmonth window to settle accumulated e-toll fees at a discount. Resistance to open road tolling remains strong.”
It added that Sanral was collecting less per month this year than last year — from July 2015 to August 2016 Sanral collected on average R76-million a month as against the average R86-million collected during the 2015 financial year.
Valid point. I can’t argue with that.
In the case of Eskom, it’s difficult to ignore the impact of the high court’s decision in August that the National Energy Regulator of South Africa should review its electricity tariff decision of March this year.
This will almost certainly delay the implementation of the tariff increases, which compromises the revenue line, which in turn compromises cash generation — all in an environment that requires sizable investment in electricity infrastructure.
That’s reason for concern for any ratings agency. I can’t argue with that either.
But as for the poor DBSA, the word “governance” appears three times in its note from Moody’s, and that makes absolutely no sense to me.
At the risk of self-obsession, let me assume the ratings agencies that will soon meet with Finance Minister Pravin Gordhan are reading this column. If so, let me remind them of the great work achieved at the DBSA.
In the four years that CEO Patrick Dlamini and his team have been in charge, a turnaround drive has been diligently executed. Two years ago, the DBSA turned a net profit of R787million from a loss of R826-million the year before. A bloated staff complement has been slashed by 49% without a murmur from the unions, which for a state-owned company is an incredible achievement.
By Moody’s own admission, the DBSA has an “ample capital base” with the bank boasting an equity-tototal assets ratio of 33.4% as of March 2015 and callable capital of R20-billion, which “provide buffers to absorb a potential increase in loan impairments”.
Indeed, we are in a challenging operating environment, but given the projects and clients the DBSA funds, the nonperforming-loans rate of 5.1% of gross loans cannot be reason for panic.
Other than drawing inferences on the implications of President Jacob Zuma’s decision to establish and chair this new SOE co-ordinating council, I am not aware of any governance concerns from the DBSA in recent times. It has an able board and a very able executive team. So what exactly is the problem? Perhaps the ratings agencies are spending too much time with Futuregrowth’s Andrew Canter and have also started imagining things.
And how does the IDC make this list anyway? According to Moody’s, “during the review, the rating agency will examine the IDC’s funding profile, including its maturity profile and funding concentrations, and its contingency plan in case the usual sources of funding become more limited. The company’s corporate structure and any potential governance changes will also be considered and re-assessed.”
Hey Moody’s, if you are looking for governance concerns, leave the DBSA and IDC alone. You are barking up the wrong tree.
Perhaps talk of the IDC moving to a separate department or inheriting the National Empowerment Fund as a subsidiary is the issue, but none of these would warrant a specific risk in my books. The ultimate shareholder remains the government; the mandate of the IDC would not change.
As for its funding profile, the IDC remains a solid entity that, like all funders, would be affected by the dynamics of the markets.
But one cannot ignore that here we are talking about a 75-year-old corporation that has serious capital to support it and its investments in tough times. Admittedly, the IDC did get some reprieve from Moody’s when it acknowledged its “large capital buffers”.
Perhaps this was a warning shot. Perhaps one should heed the warnings and not dwell on the rationale. Whatever it was, it can’t and should not dampen our spirit to a point that we lose sight of our achievements as a developmental state.
Khumalo is chief investment officer of MSG Afrika Group, and presents “Power Business” on Power 98.7 at 5pm, Monday to Thursday.
❛ Hey Moody’s, if you are looking for governance issues, leave the DBSA and IDC alone