S&P ratings of SA-focused companies holding up in spite of rising costs

Ratings on utilities and infrastructure companies were largely holding up due to government support. File image.

Ratings on utilities and infrastructure companies were largely holding up due to government support. File image.

Published Apr 16, 2024


Credit ratings on domestically focused companies were proving resilient and most of S&P’s issuers were able to keep earnings relatively stable, but discretionary spending pressure and infrastructure failure was cutting back their efficiency and had increased costs.

This was according to S&P Global, which yesterday released a report on sub-Saharan corporates.

“Our ratings on sub-Saharan African companies were volatile throughout the pandemic and subsequent recovery. In 2020, sovereign rating actions were behind 50% of the corporate rating actions in sub-Saharan Africa, 95% of which were downgrades. Upgrades in 2021 and 2022 – mainly on the back of lower financial risks – gave way to a mixed picture in 2023, as some commodity markets flagged,” S&P Global said.

Ratings on utilities and infrastructure companies were largely holding up due to government support. Nevertheless, financial and operational weakness – for example, power outages and poor rail and port capacity in South Africa – and rising debt posed structural issues to the respective economies.

Some mining company ratings were under pressure due to weaker prices for some metals, diamonds, and coal. For many mining companies, their ratings had proved resilient throughout the pandemic due to high precious metal prices, low net debt, cost-cutting, and manageable capital expenditure profiles.

However, other commodity producers continued to experience volatile market conditions.

“While ratings recovered close to pre-pandemic levels by 2023, slower global growth and destocking are hurting demand,” S&G Global said.

The rating agency expected domestically focused groups’ revenue growth to remain resilient. Metals and mining entities were expected to see a recovery in revenue growth, albeit from a low base, and the rating agency forecast mid-single-digit growth as the market gradually recovered through to 2025.

“Overall, we expect growth for all sectors to converge in the mid-single digits (in terms of revenue growth) over 2023 to 2025,” S&P Global said.

Earnings before interest, tax depreciation, and amortisation margins were expected to be resilient on the back of cost-containment measures.The weaker prices of some commodities were expected to put pressure on metals and mining groups’ profitability.

S&P expected utilities and infrastructure entities to continue to benefit from government support.

Domestically focused companies, utilities and infrastructure firms were likely to gradually deleverage. In contrast, other commodities and metal and mining groups would likely see an increase in leverage.

“Lower profitability on the back of some weak commodity prices and destocking will likely be the main drivers of leverage increases.”

Margin resilience, demand recovery, and a diligent financial policy should allow utilities, infrastructure, and domestically focused companies to reduce their adjusted leverage, S&P said.

Among the upgrades last year was that of Eskom to “B” on revised government support in November. The government’s R254 billion financial support package, as part of the Eskom Debt Relief Act signed into law on July 7, 2023, would likely cover Eskom’s debt-servicing and repayment obligations over the current and coming two fiscal years, it said.

In the same month, S&P lowered its assessment of Transnet’s stand-alone credit profile to reflect its weakening competitive position relative to similarly rated peers.

“We now assess Transnet’s financial risk as highly leveraged from aggressive before, due to the more stringent financial thresholds now applicable following our revised business risk assessment.”

In December, the ratings for Sibanye-Stillwater were lowered to “BB-” on low commodity prices and a debt increase. The outlook was negative. Lower PGM prices and operational challenges, which reduced production had lowered S&P’s revenue and Ebitda expectations. Sibanye raised $500 million (R9.4 billion) of new debt in November, 2023 to fund a $155m acquisition and shore up liquidity. Sibanye was expected to raise another $500m in 2024 to fund its Keliber lithium project.