Announcements Corporate Rating Alerts

GCR places SANRAL’s A(ZA)/ A1(za) long and short term national scale ratings and BB- international scale ratings on negative outlook, on potentially reduced government support

Rating Action

Johannesburg, 07 May 2020 – GCR Ratings (“GCR”) have affirmed the national scale Issuer ratings assigned to South African National Roads Agency SOC Limited (“SANRAL”) at A(ZA) and A1(ZA) for the long and short term respectively. At the same time, GCR has also affirmed the long-term international scale ratings of BB-. However, the outlook on both ratings have been amended to ‘Negative‘ from ‘Stable’.

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 BB- Negative Outlook

Rating Rationale

The Negative Outlook on the rating reflects GCR’s view that the assurance of financial Support to SANRAL from the Government of South Africa (“GoSA”) has diminished somewhat due to the government’s constrained fiscal position, the need to reprioritize spending in light of the COVID-19 pandemic and the increasingly inconsistent track-record of 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 investments, calling into question its ability to providing financial support to various state owned 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 reprioritize 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-cash 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%. When 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. 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.

Outlook Statement

The Negative Outlook 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.

Rating Triggers

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.

Analytical Contacts

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, January 2020
GCR Corporate Sector Risk Scores, March 2020

Ratings History

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) Stable August 2019
Short term Issuer Last National A1(ZA)
Long Term Issuer Last International BB- Stable August 2019

RISK SCORE SUMMARY

Risk score
Operating environment 14.50
Country risk score 7.50
Sector risk score 7.00
Business profile 2.50
Competitive position 3.00
Management and governance -0.50
Financial profile (8.00)
Earnings performance (3.00)
Leverage and capital structure (5.00)
Liquidity 0.00
Comparative profile 5.00
Group support 5.00
Peer analysis 0.00
Total Risk Score 14.00

Glossary

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; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

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 low projections
  • Full details of funding facilities


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