Moody times for state enterprises

Moody’s Investors Service
Moody’s Investors Service

Six South African state-owned enterprises (SOEs) have been trying to put out fires since early this month after a key local investor questioned their governance and declared a “capital strike”.

But now, they are hoping to have the financier back on board as early as this week.

Earlier this month, FutureGrowth Asset Management, which manages R170 billion, announced that it had decided to no longer fund six key SOEs owing to concerns about the independence of their respective boards after Cabinet formed a new oversight committee.

The six entities were Eskom, the Development Bank of Southern Africa (DBSA), the Industrial Development Corporation (IDC), Land Bank, Transnet and the SA National Roads Agency (Sanral).

Danish Jyske Bank also ceased lending to Eskom, again citing governance concerns.

FutureGrowth’s concerns this week partly prompted ratings agency Moody’s Investors Service to put five of the SOEs on watch for a credit rating downgrade.

Moody’s said that it was concerned about the accumulation of public debt and government contingency liabilities linked to “financially weak” SOEs.

The agency, which has the South African government at one notch above investment grade, said that “weak governance of SOEs” was one of South Africa’s “persistent structural challenges”.

Meetings with FutureGrowth

Anoj Singh, Eskom’s chief financial officer (CFO), said during an interview that Eskom had met with FutureGrowth in Cape Town on Thursday.

Singh said it was an “open discussion” about FutureGrowth’s concerns about SOEs and the asset manager had requested further information, which he declined to elaborate on.

Eskom was hopeful that, “within a short while”, FutureGrowth would again be doing business with the power utility, Singh said.

The IDC’s CFO, Nonkululeko Veleti, likewise told City Press that a meeting with FutureGrowth had been set up for this coming week.

The IDC had prepared responses to the detailed questions FutureGrowth sent them and remaining uncertainties would hopefully be ironed out at the meeting, said Veleti.

“Their questions are very general,” she said.

The IDC has carried on debt-funding activities and has not seen any pullback from funders yet, she said. Reviews by Moody’s generally take three months, but she was hoping this one could be done relatively quickly.

The Moody’s review was unexpected as the IDC had released its annual results barely two weeks ago, showing no major changes in its financial state, said Veleti.

Land Bank CEO Tshokolo Nchocho said during an interview that the Land Bank had had as many as four meetings with FutureGrowth following its decision.

FutureGrowth in hindsight admitted that it should have discussed its concerns with the Land Bank before going public, he said.

Nchocho said the Land Bank was hopeful that FutureGrowth would “confirm its continued support”.

“There was a significant level of understanding between us and them,” Nchocho said.

However, FutureGrowth’s spokesperson, Michele Usher, said “nothing has changed” with regards to the asset manager’s decision to not extend new credit to the six SOEs. She said there would be an announcement, should anything change.

Moody’s said there were early signs that institutional investors could have displayed increased risk aversion in funding South African SOEs.

Singh said that FutureGrowth was the only major company that had indicated risk aversion.

“We have engaged with all major institutional funders and FutureGrowth is the only one that had any concerns,” he said.

Nchocho said that the effect of FutureGrowth’s decision was to create a “sense of anxiety among funders”, including Sanlam and Momentum. The Land Bank had engaged with its funders and none of them said they would stop their funding, he added.

This week, the Land Bank met with a team from Nedbank Capital in this regard.

Detailed questions

While in Cape Town, the Land Bank met with seven major fund managers, including those from Old Mutual and Sanlam, to allay any fears. None of these fund managers requested any detailed information.

“Only FutureGrowth requested lots of information,” Nchocho said.

FutureGrowth analysts had sent the Land Bank a detailed series of questions regarding the governance of the bank.

These questions covered credit; investment and risk management policies; the independence of the board, as well as its various subcommittees; the Land Bank’s ethics; how the Land Bank was protected against political interference; and how conflicts of interest and “politically exposed persons” were handled, Nchocho said.

Nchocho said that the funders he had spoken to were positive about supporting the Land Bank’s fundraising efforts.

The Land Bank would be raising money in the next week or two and could be seeking about R1 billion in funding later this month, Nchocho said.

Singh said that Eskom wanted to avoid having its credit rating downgraded, but if that happened, the cost of funding would rise and the electricity producer could need to re-examine its plans and projects, he added.

However, Eskom didn’t expect that a Moody’s downgrade would have any impact on Eskom’s build programme, Singh said.

Eskom aspired to achieving an investment-grade rating and would like to get back to that position within three years, he said.

Moody’s said this week that it was concerned about the high court ruling that the National Energy Regulator of SA should review its electricity tariff decision of March this year and that this ruling could constrain future tariff hikes.

Singh said if the 9.4% power tariff increase of earlier this year were reversed, it could reduce Eskom’s revenue by as much as R15 billion. However, Eskom had put in place contingencies to raise the R15 billion, he said.

At the time Eskom released its results on July 5, the power utility said it had secured funding for the year ended March next year of R38.7 billion out of a total requirement of R68.5 billion.

Singh said Eskom, which has R35 billion in the bank, had not raised any further debt since July 5, but the company was talking to funders and was looking to raise the additional R30 billion before the end of the year.

On the other hand

In contrast to Moody’s, Standard & Poor’s (S&P) analyst Gardner Rusike said the agency would not make an announcement if it were carrying out a review of this nature. Its next review of the DBSA is in December.

S&P assigns ratings to Eskom, Transnet and the DBSA. It does not cover the IDC, Sanral or the Land Bank.

“There is no treatment of them as a group,” said Rusike of the three SOEs his agency covers.

The FutureGrowth issue might get a mention when the SOEs’ next reviews come up, if it affects what the ratings agency cares about: liquidity or funding, he said.

Fitch already reviewed its ratings for Eskom, Transnet and the DBSA last month.

All the SOEs have credit ratings that are tied to the government’s presumed willingness to support them, which ties their ratings to that of the government itself.

All three major ratings agencies will be reviewing the government’s creditworthiness in the next few months.

Despite CEO Siyabonga Gama’s fighting words earlier in the week about “suing” FutureGrowth, on Friday Transnet responded to queries with a bland statement that it “is currently engaging with FutureGrowth on the lender’s funding approach towards Transnet”.

“We would like to give this process a chance to unfold and not discuss the matter at this stage.”

Sanral auction

Sanral this week declared its auction of R500 million in bonds a major success.

It was the first big funding exercise by one of the SOEs since FutureGrowth’s announcement.

The bond auction was three times oversubscribed with funders offering R1.7 billion, Sanral’s CFO, Inge Mulder, said in a statement.

More importantly, most of this money was chasing a bond that would garner 1.43% in extra interest when compared with benchmark government bonds.

The last time Sanral auctioned bonds, in July, they were sold for an interest rate 1.44% more than government bonds with the same maturity date.

The message from Sanral was that FutureGrowth’s stance did not visibly affect the market.

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