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Banks, Eskom, Transnet and MTN cut to junk status

| Economic factors

Fitch Ratings downgraded Absa (and Barclays Africa), Nedbank, FirstRand, Standard Bank, Investec, Eskom, Transnet and MTN to BB+ or junk status, while Standard & Poor’s (S&P) continued its downgrade of South African firms with four more downgrades on 11th April 2017.

This followed both rating agencies decisions to downgrade South Africa's long-term foreign-currency issuer default ratings (IDRs) to BB+ from BBB-.

BB+ and below is deemed non-investment grade, or junk status. All ratings have been moved to stable.

Fitch’s downgrade of South Africa to junk last Friday followed that of S&P last Monday. Both cited political instability and policy uncertainty following President Jacob Zuma’s decision to remove Pravin Gordhan and Mcebisi Jonas from their positions as minister and deputy minister of finance respectively on 30 March.

S&P had already downgraded various entities, including banks, as no entities can carry a higher rating than the sovereign rating.

Why Fitch downgraded Eskom, Transnet and MTN

  • ESKOM: Fitch said in a statement on Tuesday that it “continues to assess the links between Eskom and the South African state as strong, with significant emphasis placed on the guarantee framework agreement, which leads to a rating alignment with the sovereign”. In a statement, Eskom chief financial officer Anoj Singh said the power utility remains “resolute in responsibly executing Eskom’s funding plan for the completion of the current build programme and ensuring continued security of supply for the country”.
  • TRANSNET: Fitch said Transnet's ratings are constrained by the sovereign rating, as it typically does not rate state-owned entities above the sovereign. “Fitch assesses the links between Transnet and the sovereign as moderate to strong, which until 2015 led to a one-notch uplift of Transnet's rating from the standalone level,” it said.
  • MTN: “MTN's rating reflects the weakness of the macroeconomic and operating environments of MTN's main operating subsidiaries in South Africa and Nigeria. The FX mismatch between net debt and cash flow could lead to higher leverage if the US dollar strengthens. MTN's rating is constrained by the South African sovereign rating.”

Fitch downgrades top 5 banks

Fitch said that the IDRs of the banks are driven by their standalone creditworthiness, as defined by their respective viability ratings. This viability rating has been downgraded to BB+ because of the banks' high exposures to sovereign risk, through large holdings of government securities, exposure to sovereign-owned enterprises and to the weakening operating environment, Fitch said.

"All banks have strong franchises, sound management and governance, and solid financial metrics, which keep their VRs at the level of the sovereign's Long-Term IDRs,” it said.

“However, their VRs are capped at the level of the sovereign's IDRs because the majority of the banking groups' operations are in South Africa and they have high exposure to domestic sovereign debt relative to capital.”

“The deterioration in sovereign creditworthiness brings increased risks to the banking sector. Higher borrowing costs for the sovereign will translate into further pressure on economic growth, which is likely to result in deterioration of banks' financial metrics, in particular, asset quality, funding and liquidity, which is likely to have a knock-on effect on profitability and capital.

"Banks will have to build higher capital buffers to meet elevated risk in their operating environment to maintain their VRs.”

S&P downgrades four more SA firms on Tuesday

  • SANTAM: S&P downgraded Santam to BBB- from BBB on Tuesday, maintaining their negative outlook. “S&P’s ratings on Santam are limited by the local currency sovereign credit rating on South Africa,” Santam said.
  • SANLAM: S&P downgraded Sanlam Life’s South Africa national scale rating was reduced from zaAAA to zaAA-, and the ratings of the SLI3 and SLI4 subordinated deferrable debt issued by Sanlam Life from zaAA- to zaA. “The lower ratings reflect S&P’s view that South African insurers face increased exposure to credit risk within asset portfolios following the sovereign downgrade, with the increased risk somewhat mitigated by sound balance sheet resilience," Sanlam said.
  • EXXARO: S&P downgraded Exxaro's long-term South African national scale rating to ‘zaBB-’ from ‘zaBB+’ and affirmed its short-term national scale ratings at ‘zaB’.
  • OLD MUTUAL: S&P downgraded Old Mutual Life Assurance Company (South Africa) Limited’s (OMLACSA) long-term South African national scale rating to zaAA- from zAAA,  while its short-term rating was affirmed at zaA-1. 


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