Johannesburg, 04 May 2021 – GCR Ratings (“GCR”) has downgraded South African National Roads Agency SOC Limited’s (“SANRAL”) national scale issuer ratings to A-(ZA) and A2(ZA) for the long and short term respectively, the outlook remains on Negative. Concurrently, the long-term international scale issuer rating assigned to SANRAL has been affirmed at B+, outlook Negative.
The downgrade on SANRAL’s national scale credit ratings reflects the high refinancing requirements over the medium term, coinciding with a lesser assurance of financial support from the Government of South Africa (“GoSA”) for State Owned Companies (“SOC”) because of a weakened fiscal position. These risks are further reflected in the Negative Outlook on both the national scale and international scale ratings.
The major rating constraint impacting SANRAL is the high level of debt on its balance sheet, with insufficient operating cash flows due to its inability to collect the tolls associated with the Gauteng Freeway Improvement Projects (“GFIP”). Although gross debt decreased slightly to around R46bn at FY21 (FY20: R47.8bn), debt coverage metrics remain very weak. Toll income has been sufficient to cover interest costs, but the ratio remains low at 1.3x in FY20 (FY19: 1.1x), whilst including other operating expenses coverage is only around 70%. To compensate for the lost toll income and ensure SANRAL is able to service its finance obligations, the GoSA has provided special grant income over the past few years, but it has not been sufficient to reduce the overall debt burden.
Given SANRAL’s inability to meet debt obligations from its own cash flows, any refinancing is heavily dependent on continued support from the GoSA, in the form of Guarantees and the expectation of continued grant transfers. However, the GoSA’s inconsistent approach to resolving funding constraints at other parastatals over the past year has reduced investor confidence in such support. This is largely a factor of the deterioration in the National Governments fiscal position in light of declining tax inflows and COVID-19 related disruptions, but also reflects some policy ambivalence in addressing the funding issues impacting SOC.
Despite the challenges, SANRAL’s pro-active treasury management of debt is noted in support of its liquidity. SANRAL refinanced around R3.9bn in debt maturities during FY21, and does not have further maturities during FY22, aside from the promissory notes that are rolled on an annual basis. As part of the refinancing, around R2bn in new notes were issued with maturities in excess of 10 years, indicating some renewed appetite for longer-term SANRAL bonds. However, SANRAL now faces much larger debt maturities of around R9bn per annum over the FY23-FY25 period. Thus, despite addressing short term liquidity, liquidity coverage over the 12 to 24-month period is very weak as there are no firm commitments to refinance these maturing bonds.
Nevertheless, GCR’s rating continues to factor in a high level of support from the GoSA into SANRAL’s rating based on the critical role SANRAL performs in facilitating the South African economy, with its position mandated and protected by legislation. Support has been demonstrated through continued disbursement of budgeted grants to SANRAL, as well as the unearmarked fund transfers that have been approved over the past three years. Further unearmarked fund transfers have been budgeted from FY22 and FY23. Accordingly, the current rating is premised on the expectation that the SANRAL will be able to achieve large debt refinancing on an ongoing basis over the medium term.
The Negative Outlook reflects SANRAL’s elevated refinancing risk in light of the c.R9bn per annum in maturing debt between FY23 and FY25. The risk is heightened by its reliance of the GoSA to facilitate the refinancing, at a time when the National fiscus is stretched.
Negative rating action would derive from any further perceived decrease in funding support from the GoSA. Negative rating action could also arise if SANRAL does not timeously refinance its large maturing facilities between FY23-FY25 or is only able to access short term refinancing facilities.
Conversely, positive rating action could arise if SANRAL is able to refinance the maturing facilities with notes having maturities in excess of 10 years. 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.
|Primary analyst||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||Shevel@GCRratings.com||+27 11 784 1771|
|Committee chair||Yohan Assous||Group Head of Structured Finance|
|Johannesburg, ZA||YohanA@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, March 2021|
|GCR Corporate Sector Risk Scores, April 2021|
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||July 2020|
|Short term Issuer||Last||National||A1(ZA)|
|Long Term Issuer||Last||International||B+||Stable||July 2020|
RISK SCORE SUMMARY
|Rating Components & Factors||Risk score|
|Country risk score||7.00|
|Sector risk score||6.00|
|Management and governance||(0.50)|
|Leverage and capital structure||(5.00)|
|Government support floor||5.00|
|Total Risk Score||12.00|
|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 2020
- Four years of comparative audited numbers
- Cash flow summary at March 2021
- 12-month cash flow projections
- Full details of funding facilities at March 2021