The agency downgraded to Baa2 the Development Bank of Southern Africa (DBSA) and Industrial Development Corporation of South Africa (IDC).
The rating agency assigned a stable outlook to IDC’s issuer rating, and maintained the negative outlook on DBSA’s issuer rating.
“Today’s rating action was prompted by the weakening capacity of the South African government to provide support to DBSA and IDC in case of need, as captured by Moody’s recent downgrade of South Africa’s government bond rating to Baa2 (stable), from Baa1 (negative),” read agency’s statement.
The agency added that another reason was the policy signal by the South African government of the need for financial independence by the state-owned entities, implying a moderation of the government’s willingness to support these two financial institutions.
“Today’s one-notch downgrade of DBSA’s and IDC’s issuer ratings reflects the weakening capacity of the South African government to support these institutions in case of need, as captured by Moody’s one-notch downgrade of South Africa’s government bond rating to Baa2 (stable), from Baa1 (negative), announced on 6 November 2014.”
Moody’s said the downgrade also reflects the moderation of Moody’s government support assumptions for these two institutions.
“This change was triggered by the government’s recent medium-term budget policy statement in which it emphasised that state-owned entities need to become viable and sustainable organisations without seeking financial assistance from the state.”
The agency said, despite the moderation in Moody’s government support assumptions, the rating agency continues to view the probability of government support being provided in the event of need for IDC and DBSA as high.
This is based on their development mandates and their strategic importance in terms of policy implementation, support of institutional and industrial capacity development, which are strategic pillars for the government; and full government ownership with no intention to privatise.
Moody’s now incorporates three notches of rating uplift based on government support assumptions, from DBSA’s baseline credit assessment (BCA) of ba2, and two notches of rating uplift from IDC’s BCA of ba1, which aligns their issuer ratings with South Africa’s rating.
Ratings agency assigned a stable outlook to IDC’s foreign-currency issuer rating, in line with the government’s rating outlook, in view of the company’s sizeable buffers in the form of investment revaluations to absorb any shocks in the currently slowing economy.
IDC’s loan book relative to its balance sheet is small comprising only around 15 per cent of total assets as of March 2014, while its equity investments including any relevant revaluations accounted for a high 67 per cent of total assets.
“The rating agency notes that IDC’s revaluation gains in its investment book increased by 7.6 billion rand during the fiscal year ending March 2014 (FY2014), which more than covered its total loan impairments of around 1.2 billion rand during FY2014.”
In addition, Moody’s said IDC was a lowly-leveraged institution with a capital base, including any revaluation reserves, accounting for a high 77.2 per cent of its total assets as of March 2014, supporting its BCA of ba1.
Moody’s said that it does not expect any impact on IDC’s financial standing from the government’s recent decision in its medium-term budget policy statement to sell non-strategic assets in order to support other state-owned entities.
The rating agency maintained the negative outlook on DBSA’s Baa2 foreign-currency issuer rating, reflecting the balance between the recent recovery of DBSA’s financial performance and concerns regarding the sustainability of this performance in the current challenging domestic economy.
Although Moody’s recognises that DBSA’s restructuring in the last two years has improved its financial performance with 787 million rand profits recorded in FY2014, compared to losses of 826 million rand in FY2013 and 371 million rand in FY2012, the rating agency considers that it will be challenged to sustain its turnaround performance.”
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Moody’s said it expects that DBSA’s development loan book (net loans accounted for a high 78.5 per cent of total assets in March 2014) will remain susceptible to the economic slowdown, with GDP growth of around 1.4 per cent projected for2014 and 2.5 per cent in 2015, well below the historical average of 4.9 per cent in the past (2004-08).
“In Moody’s view, and following the recent downgrade of South Africa’s government bond rating and moderation of Moody’s government support assumptions, there is a low likelihood of upwards rating momentum over the near-term.”
Any indication of a further weakening of the South African government’s willingness to support either DBSA or IDC, or any significant deterioration in its capacity to extend financial support, could negatively affect DBSA’s and IDC’s issuer ratings.