Johannesburg, 08 July 2020 – GCR Ratings (“GCR”) has downgraded the long-term international scale issuer rating assigned to South African National Roads Agency SOC Limited (“SANRAL”) to B+, from BB- previously, outlook Stable. At the same time, GCR has affirmed SANRAL’s national scale issuer ratings at A(ZA) and A1(ZA) for the long and short term respectively, the outlook remains on Negative.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|South African National Roads Agency SOC Limited||Long Term issuer||National||A(ZA)||Negative Outlook|
|Short Term issuer||National||A1(ZA)|
|Long Term issuer||International||B+||Stable Outlook|
The downgrade to SANRAL’s international scale rating follows the decrease in GCR’s South African country risk score and a reduction in the sector risk score for State Owned Companies (“SOCs”). The lower country risk score reflects GCR’s view of a weaker domestic fiscal position, with deeply negative economic growth expected in the short term due to COVID-19, and more modest projections over the medium/ long term, as well as continued pressure on the local currency. All SOCs are also expected to be negatively impacted by reduced business volumes and the weaker ability of the Government of South Africa (“GoSA”) to support funding requirements.
GCR has also placed the National Scale ratings on Negative Outlook, reflecting our view that the assurance of financial Support to SANRAL from the Government of South Africa (“GoSA”) has diminished somewhat due to its constrained fiscal position, the need to reprioritize spending in light of the COVID-19 pandemic and weak support for certain highly indebted State Owned Entities. Nevertheless, given the important position SANRAL occupies in the South African economy, GCR continues to apply its credit support floor.
GCR’s considers the certainty of ongoing financial support by the GoSA’s to have been somewhat eroded by recent events. Even prior to the COVID-19 pandemic, the GoSA was facing a weakening economy, reduced tax revenue and the need to cut back on certain capital investment, calling into question its ability to provide financial support to various entities. The COVID pandemic has significantly exacerbated these weaknesses, with a substantial contraction in economic performance and tax revenue now expected through 2020, resulting in the need to reprioritise spending towards social services. In addition, recent events at certain State-Owned Entities have demonstrated an unwillingness by the GoSA to provide timeous financial assistance, if at all.
The above notwithstanding, GCR continues to view SANRAL as fulfilling a critical role in the South African economy, with its position mandated and protected by legislation. Although SANRAL does not operate with a profit motive, but rather looks to recover project costs over a very long project implementation cycle, its standalone financial profile continues to be weakened by the non-payment of Gauteng Freeway Improvement Project (“GFIP”) tolls, which has placed additional pressures on cash flows. The lost income from GFIP has been compensated for by large special grants in FY18 and FY19, albeit that these have largely been appropriated from funding initially budget for the non-toll portfolio. Delays in carrying out projects within the non-toll portfolio has resulted in excess cash been available, but such appropriations are not sustainable over the longer term.
Due to the special grant funding, SANRAL was able to reduce gross debt to R47.bn at FY19, a level that was largely maintained at FY20. However, debt coverage metrics remain very weak. Toll income has been sufficient to cover interest costs, albeit that the ratio fell to 1.2x in FY19 (FY18: 1.6x), but including other operating expenses coverage is only around 70%. Including the special grant income interest coverage improved to 1.7x at Y19 within the toll portfolio, while net debt to EBITDA was around 5x, highlighting the dependence of SANRAL on ongoing grant support to meet its financial obligations.
Positively SANRAL has benefitted from renewed appetite for its bond issuances in the market, and a number of maturing bonds were refinanced during FY19 and FY20 through several asset managers. However, uncertainty regarding its financial profile is still reflected in much shorter maturities for the bonds, mainly 3-5 years, compared to upwards of 10 years historically. Positively, as a result of the refinancing, SANRAL only has R3.9bn of maturing debt in FY21, which is already covered by cash resources and available facilities. This has supported GCR’s assessment of neutral liquidity coverage over the next 24 months, even after factoring the potential for lower toll income due to the impact of the COVID-19 pandemic on reducing traffic volumes. However, the large debt maturities in FY24 represent a major credit risk if not refinanced well in advance.
The Negative Outlook on the national scale ratings reflects GCR’s concerns that the significant deterioration to the fiscal position of the GoSA, amidst a weakening economy and compounded by the COVID-19 pandemic, will force the GoSA to reprioritise its budget and potentially reduce timeous financial support to other State-Owned Entities. We currently do not anticipate a rating action on the international scale.
Negative rating action would derive from any further perceived decrease in funding support from the GoSA. In addition, the substantial debt maturities in FY24 represents a major risk if they are not refinanced well in advance. Although considered to be unlikely over the rating horizon, the rating could improve if there is a resolution to the GFIP toll payment issues that would allow SANRAL to move towards financial self-sustainability. Measures taken to ease the substantial debt burden could also see the rating improve.
|Primary analyst||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
|Committee chair||Matthew Pirnie||Group Head of Ratings|
|Johannesburg, ZA||MatthewP@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Corporate Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, May 2020|
|GCR Corporate Sector Risk Scores, July 2020|
South African National Roads Agency SOC Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term Issuer||Initial||National||A(ZA)||Stable||August 2019|
|Short Term Issuer||Initial||National||A1(ZA)|
|Long Term Issuer||Initial||International||BB-||Stable||August 2019|
|Long Term Issuer||Last||National||A(ZA)||Negative||May 2020|
|Short term Issuer||Last||National||A1(ZA)|
|Long Term Issuer||Last||International||BB-||Negative||May 2020|
RISK SCORE SUMMARY
|Rating Components & Factors||Risk score|
|Country risk score||7.00|
|Sector risk score||6.50|
|Management and governance||(0.50)|
|Leverage and capital structure||(5.00)|
|Government support floor||5.00|
|Total Risk Score||13.00|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Conditions||Provisions inserted in an insurance contract that qualify or place limitations on the insurer’s promise to perform.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Income||Money received, especially on a regular basis, for work or through investments.|
|Interest Cover||Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.|
|Interest||Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Long Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Offset||A right (Right of Offset) to set liabilities against assets in any dispute over claims.|
|Operating Cash Flow||A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
|Upgrade||The rating has been raised on its specific scale|
SALIENT POINTS OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument;.
The credit ratings have been disclosed to South African National Roads Agency SOC Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
South African National Roads Agency SOC Limited participated in the rating process through management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from South African National Roads Agency SOC Limited and other reliable third parties to accord the credit ratings included:
- The audited financial results for March 2019
- Four years of comparative audited numbers
- Cash flow summary to March 2020
- 12-month cash flow projections
- Full details of funding facilities