For the second time in just over two months, Moody’s Investors Service has downgraded the credit rating of the SA National Road Agency (Sanral). After cutting the road agency’s status from A3 to Baa1 at the end of February, Moody’s cut it again on Friday to Baa2 with a negative outlook – which implies yet another downgrade is on the way.
The lower the rating, the higher the agency’s cost of borrowing. As Sanral is already cash-strapped, the bigger interest bill implies more help will be needed from the government, which is its sole shareholder, after a R5.75 billion subsidy was allocated in the February budget. Ultimately the additional costs will be met by taxpayers, many of whom actively opposed e-tolling.
Moody’s second move followed the Gauteng North High Court decision, eight days ago, which halted tolling on Gauteng’s highways just ahead of the scheduled implementation date on Monday last week. The Treasury intervened in the action in an attempt to stave off adverse reactions by ratings agencies and investors. It feared Sanral’s financial woes would compromise the ability of other South African institutions to borrow on international capital markets.
Despite the Treasury’s role in the court action, the ANC agreed with Cosatu, ahead of the high court judgment, that tolling would be postponed for a month. The unexpected policy reversal damaged the government’s image and could compromise the country’s sovereign rating.
Moody’s, along with two other rating agencies, has downwardly revised South African government bond ratings from stable to negative, because of uncertainty surrounding fiscal policy.
Moody’s noted on Friday that public opposition had already led the government to postpone the implementation of e-toll collections from June this year. It said the delays had resulted in revenue losses of about R2.7 billion “which is a sizable 40 percent of its estimated 2012 annual budget”.
Kenneth Morare, Moody’s lead analyst for Sanral, warned the losses would grow by an estimated R100 million each month the delay continued “and will gradually erode the company’s cash buffer”.
Moody’s noted that Sanral incurred R20bn in debt – of which about 50 percent is guaranteed by the government – to finance the Gauteng Freeway Improvement Project (GFIP) and said the e-toll revenues were essential to servicing this debt and absorbing operating costs.
The GFIP is responsible for most of the rapid increase in Sanral’s debt stock to its current level of R39.7bn, or six times its 2012 estimated annual revenue, according to Moody’s. Morare said Sanral’s high debt level and uncertainties over e-tolling issues would make it difficult for Sanral to borrow more to fund the operating deficits arising from its loss of e-toll revenue.
Sanral’s negative outlook reflects both the operational risks associated with the e-tolling system and Moody’s concerns over South Africa’s deteriorating operating environment.
Moody’s outlook would not be changed to stable until the negative sovereign outlook is stabilised, the credit agency said. A stable outlook would also require “a positive resolution of the GFIP issue” which would improve Sanral’s financial position and prospects.