Johannesburg - International ratings agency Moody’s Investor Service on Wednesday night placed five of the country’s biggest parastatals on review, warning that the state-owned companies faced a possible downgrade in the future.
Moody’s put Eskom, the South African National Roads Agency Limited (Sanral), the Industrial Development Corporation (IDC), the Land Bank and the Development Bank of Southern Africa (DBSA) in its crosshairs. The agency has charged that the review for downgrade of the state-owned enterprises (SOEs) primarily reflected the increased risk of funding and liquidity challenges, following some signals of increased risk aversion by funding counter parties owing to market concerns regarding their governance.
The agency blamed the potential weakening of SOEs' financial performance given challenges in the broader operating environment.
It said in the context of these considerations, it would 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.
Challenges
“The rating review will assess the impact of ongoing challenges in the operating environment - including the still low commodity prices and the effects of the extensive drought that have been affecting South Africa’s agricultural sector - on the financial performance of these entities,” Moody’s said.
On Eskom, Moody’s said the North Gauteng High Court ruling in March that the utility should review its electricity tariff decision and the pending appeal process meant that tariffs might be affected which in turn could further exacerbate the funding needs.
The National Energy Regulator of SA has decided to appeal the judgment.
Moody’s said Eskom’s rising costs as a result of growth in power purchase agreements with independent power producers and a very significant capital expenditure programme to expand the electricity infrastructure could also escalate its financing needs. The utility was likely to continue to see a material growth in debt levels.
“This will likely require the company to increasingly raise debt under its existing R350 billion guarantee framework agreement with the government of South Africa (Baa2 negative) to minimise funding costs,” Moody’s said.
“Headroom under the framework agreement, which supports the company’s structurally weak liquidity position, could therefore be reduced in the medium to longer term. These funding challenges arise at a time when investors could display an increased risk aversion in funding South African state-owned companies have appeared.”
Moody’s also shone the light on controversies Eskom has involved itself in recently, including the National Treasury’s ongoing investigation into the power utility’s coal supply contracts amid suspicions that it had favoured the Gupta-owned Tegeta Exploration & Resources.
“While there has been no evidence so far of Eskom being impacted, investor sentiment is key for the company given its need to access the debt markets to fund its negative free cash flows and refinance debt maturities,” Moody’s said.
Moody’s decision comes weeks after Futuregrowth Asset Management, Africa’s biggest private fixed-income money manager, last month announced that it would stop lending money to Eskom, Transnet, Sanral, the Land Bank of SA, IDC, and the DBSA, citing about how the entities were run, government infighting and threats to the independence of the finance ministry.
At the same time, the government announced that President Jacob Zuma would chair the Presidential State-Owned Enterprises Co-ordinating Council.
Eskom said last night that it had noted the concerns raised by Moody’s in its ratings update to place the company’s Ba1 senior unsecured and Ba1 senior unsecured medium-term note ratings on credit review.
“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. We will however continue to engage with the rating agency to resolve the concerns,” said Eskom chief financial officer Anoj Singh.
Economist Iraj Abedian said the review was a precursor to the rating agencies’ formal view later this year.
Controversies
Abedian said the review would also affect Eskom’s borrowing programme. “Not with all the controversies that Eskom has created, including allegations of state capture, Eskom had not done enough to dispel speculation that it favoured Tegeta,” he said.
Wayne Duvenage, the chairman of the Organisation Undoing Tax Abuse, said the action by Moody’s reflected a number of the issues confronting Sanral and that all the agency’s schemes to collect the outstanding e-toll debt had been debunked.
Duvenage said the alliance had told the national transport department it needed to sit down with Treasury and civil action groups to find an alternative way to raise these funds.
“Treasury could say it was adding 9 cents a litre to the fuel levy until the GFIP (Gauteng Freeway Improvement Project) is paid off. That is one option and we support that,” he said.
However, Duvenage said Sanral still had a problem regarding the cost of GFIP and the alliance was calling for an investigation on why the project cost almost R11 billion more than it should have cost.
* With additional reporting by Roy Cokayne
BUSINESS REPORT