Downgrade risk: Eskom, Sanral, DBSA, IDC and Land Bank | Fin24
 
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Downgrade risk: Eskom, Sanral, DBSA, IDC and Land Bank

Sep 14 2016 20:04

Cape Town - Moody's Investors Service announced on Wednesday that it is placing Eskom, Sanral, DBSA, IDC and the Land Bank on review for downgrades.

In separate statements, the ratings agency cited funding and liquidity challenges facing the institutions. Moody's also referred to concerns of the governance of state-owned enterprises (SOEs) that was raised by asset managers.

Futuregrowth, a R150bn asset manager, announced it would no longer fund Eskom, Transnet, Sanral, Landbank, the IDC and the DBSA. It cited, in particular, concern about the independence of their respective boards from a new council, to be led by President Jacob Zuma.

Fund manager Abax Investments, which has reduced bond purchases from SOEs, said it will not follow in the footsteps of Futuregrowth to withdraw funding. However, portfolio manager Rashaad Tayob said Abax, which has R80bn under management, was also concerned after the cabinet said a new committee would be formed to oversee SOEs that would be headed by Zuma.

Moody's outlined the following for placing the institutions under review:

Eskom

The Ba1 senior unsecured and (P)Ba1 senior unsecured MTN ratings of Eskom is under review.

"The rating review reflects the rising funding challenges faced by Eskom in the context of an adverse regulatory framework and an evolving political environment," it said.

Commenting on the North Gauteng High Court ruling that the National Energy Regulator of South Africa should review its electricity tariff
decision of March 2016, Moody's said notwithstanding an ongoing appeal process, future tariffs might be affected.

This in turn, it said could further exacerbate the funding needs of Eskom against a backdrop of rising costs and a very significant capex programme to upgrade and expand the country's electricity infrastructure.

"In addition, Eskom will likely continue to see a material growth in debt levels because cost-reflective tariffs are yet to be implemented."

Moody's said this will likely require Eskom to increasingly raise debt under its existing R350bn government Guarantee Framework Agreement to minimise funding costs.

It said headroom under the GFA, which supports the company's structurally weak liquidity position, could therefore be reduced in the medium to longer
term.

Eskom responds:

“The review by Moody’s is 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," said Anoj Singh, chief financial officer at Eskom.

"We will however continue to engage with the rating agency to resolve the concerns that resulted in this decision. We remain confident that continued engagements with all relevant stakeholders and government will contribute towards a positive outcome for Eskom and the country,” he added.

Sanral

Sanral's long-term and short-term issuer ratings of Baa3/P-3 (global scale) and of Aa3.za/P-1.za (South African national scale) are under review.

Moody's said Sanral's rating review reflects ongoing cash flows pressure, despite a number of interventions by the government to encourage e-toll payments.

"Road users barely utilised the opportunity to clear their outstanding debt during a recent six-month window to settle accumulated e-toll fees at a discount. Resistance to open road tolling remains strong, as from July 2015 to August 2016 Sanral collected on average R76m per month which is lower than the average R86m collected during FY2014-15."

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.

"At the same time, Moody's has lowered the issuer's standalone credit profile (Baseline Credit Assessment) to b3 from b2, which mainly reflects the decline in GFIP toll revenues."

Moody's said the review also reflects rising funding challenges, following signals of increased risk aversion by funding counterparties owing to market concerns regarding the governance of state-owned enterprises.

DBSA, IDC and Land Bank

Moody's also placed on review for downgrade the Baa2 foreign-currency long-term issuer ratings of the Development Bank of Southern Africa, Industrial Development Corporation of South Africa, and the Land and Agricultural Development Bank of South Africa.

"Today's review for downgrade of these three South African government-related issuers (GRIs) primarily reflects the increased risk of funding and liquidity challenges, following some signals of increased risk aversion by funding counterparties owing to market concerns regarding the governance of South African state-owned enterprises."

In addition to these developments, the review also reflects a potential weakening of their financial performance given challenges in the broader operating environment.

"Likewise, in the context of these considerations, Moody's will also assess the implications of any new amendments to the governance structure of these institutions and whether they would alter  the likelihood of government support," the ratings agency said.

"Moody's currently assumes an exceptionally high probability of government support for DBSA, IDC and Land Bank, if needed, owing to the entities' close integration with the government, given public ownership, development mandates and the critical policy roles they play in the domestic economy."

Development Bank of Southern Africa

During the review, the rating agency will examine DBSA's funding profile, including its maturity profile and funding concentrations, and its contingency plan in case usual sources of funding become more limited. The company's corporate structure and potential governance changes will also be considered and re-assessed.

"Against the above considerations, the review will also factor in DBSA's ample capital base (equity-to-total assets ratio of 33.4% as of March 2015) and callable capital of R20bn, which provide buffers to absorb a potential increase in loan impairments."

Moody's said in the currently challenging operating environment, DBSA is likely to be faced with rising nonperforming loans (which stood at 5.1% of gross loans as of March 2015) and increased earnings pressure in the next 12-18 months, although it does acknowledge its improved profitability over the past two years.

Industrial Development Corporation of South Africa

During the review, the rating agency will examine 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.

Moody's will also assess the impact of on-going challenges in the operating environment - including the still low commodity prices - on IDC's investment portfolio, including its commodity-related subsidiaries that were loss making in the financial year ending March 2016.

"Depressed commodity prices are also exerting pressure on IDC's dividend income and equity investments, which constitute around 59% of its total assets as of March 2016, predominantly in commodity-related exposures," it said.

Land and Agricultural Development Bank of South Africa

During the review, the rating agency will examine Land Bank's funding profile, including its maturity profile and funding concentrations, its high - though declining - reliance on short-term funding, and its funding and contingency plan in case the usual sources of funding become more limited.

"Moody's will also consider the government's track record of supporting the funding position of Land Bank and the extent to which this support remains intact."

Land Bank currently enjoys a R4bn government guarantee, while an estimated 30% of total funding is obtained from government-related institutions such as the Public Investment Corporation, which Moody's consider less confidence sensitive.

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