MOODY’S Investors Service has today downgraded to Baa2 from Baa1 the foreign-currency long-term issuer ratings of two South African development finance institutions, 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); and (2) 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 rating action 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.
According to Moody’s, the statement signals a moderation in the government’s willingness to provide financial support to government-owned entities if needed, including IDC and DBSA.
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, 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 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% of total assets as of March 2014, while its equity investments including any relevant revaluations accounted for a high 67% of total assets.
The rating agency notes that IDC’s revaluation gains in its investment book increased by ZAR7.6 billion during the fiscal year ending March 2014 (FY2014), which more than covered its total loan impairments of around ZAR1.2 billion during FY2014.
In addition, IDC is a lowly-leveraged institution with a capital base, including any revaluation reserves,
accounting for a high 77.2% 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.
African Eye News.com
