Moody's places on review for downgrade the Baa3 issuer ratings of DBSA, IDC and Land Bank.
The rating action on these three government-related issuers (GRIs) primarily reflects South Africa's weak operating environment and the government's weakening capacity to support these institutions in case of need, as captured by Moody's recent decision to place South Africa's Baa3 government bond ratings on review for downgrade.
The rating action is primarily driven by the potential deterioration of the South African government's credit profile, as captured by Moody's recent rating action to place the sovereign rating (Baa3) on review for downgrade. The issuer ratings of all three entities benefit from a rating uplift from their stand-alone credit profiles, owing to their full government ownership and the developmental and policy role that they play in the market. The rating review also takes into account the likely pressure on these GRIs' financial performance due to the current headwinds faced in South Africa's operating environment. The rating agency expects GDP growth of only 0.5 per cent in 2017 and 1.2 per cent in 2018 from 0.3 per cent in 2016, levels significantly below the government's target growth.
A possible downgrade of the sovereign rating would also change the mapping used to derive South African GRIs' NSRs, given that the sovereign rating acts as an anchor point for the national scale. Moody's NSRs are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks.
Accordingly, in conjunction with the rating review of their global-scale ratings, DBSA's, IDC's and Land Bank's long-term NSRs were placed on review for possible downgrade, along with Moody's expectation that a remapping of the NSR in the event of a sovereign downgrade would provide a wider range of NSR positions for the highest global scale rating assigned to local entities compared to what was previously the case.
Moody's views the probability of government support being provided to DBSA in the event of need as high, based on (1) its development mandate and strategic importance in terms of policy implementation; (2) DBSA's 100 per cent government ownership with no medium term plans to divest its stake; and (3) the government's commitment for a capital injection and lack of any legal barriers for DBSA's timely support. As a result, Moody's incorporates two notches of rating uplift based on its government support assumptions, from DBSA's stand-alone credit profile of ba2, which aligns its issuer rating with South Africa's rating of Baa3.
During the review, the rating agency will assess whether and to what extent the government's capacity to support DBSA has weakened and, therefore, the extent to which it impacts DBSA's issuer rating. Concurrently Moody's will examine DBSA's stand-alone credit profile positioned at ba2, in the context of the current economic headwinds and the impact these may have on DBSA's asset quality metrics, profitability and funding/liquidity profile.
IDC's issuer rating of Baa3 takes into account its full government ownership, and its important strategic role in carrying out the government's industrial development policies and, by extension, its social transformation policies. Accordingly, Moody's incorporates two notches of rating uplift based on its government support assumptions from IDC's stand-alone credit profile of ba2, which results in a Baa3 issuer rating.
During the review, the rating agency will examine the government's capacity to support IDC in case of need. Moody's will also assess IDC's stand-alone credit profile of ba2, in view of the challenging operating conditions, evolving investor confidence and its high asset risks as evident by its significant equity investments that accounted for around 39 per cent of its total assets as of March 2017. The latter expose IDC to significant revaluation risks, an issue exacerbated by its single name concentrations.
Land Bank's Baa3 issuer rating incorporates three notches of rating uplift from its ba3 stand-alone credit profile, reflecting its full government ownership, underpinned by a track record of supporting both the capital and funding position of the bank, and its role in the development of South Africa's agricultural sector, which is considered as one of the cornerstones of South Africa's economy.
During the review, the rating agency will assess its very high government support assumptions incorporated into Land Bank's ratings, in the context of the government's potentially weakening capacity to support the institution in case of need, as suggested by South Africa's current rating review for downgrade. Concurrently Moody's will examine Land Bank's stand-alone credit profile positioned at ba3, in the context of on-going economic headwinds and how these may affect its asset quality metrics, moderate capital buffers and its funding/liquidity profile.
As indicated by the rating review, there is currently no upward pressure on DBSA's, IDC's and Land Bank's ratings over the near term. Any further weakening of the South African government's credit profile and/or willingness to support either DBSA, IDC or Land Bank, or any significant deterioration in its capacity to extend financial support, could negatively affect DBSA's, IDC's and Land Bank's issuer ratings.
In addition, a further weakening of these GRIs' stand-alone credit profile, driven by a deterioration in asset quality, earnings and capital buffers due to the challenging economic environment, would likely exert downward ratings pressure.
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|Date:||Dec 5, 2017|
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