Moody’s Investors Service has downgraded the ratings of the South African National Roads Agency Limited (SANRAL) today (4 May 2012) on the backdrop of the recent High Court ruling to block the implementation of Gauteng’s e-toll system.
The road agency’s global scale, local and foreign currency issuer ratings have been downgraded to Baa2/P-3 from Baa1/P-2, and the South African national scale issuer ratings has been downgraded to A2.za/P-2.za from Aa3.za/P-1.za.
The outlook on the ratings remains negative.
Moody’s said in a statement that the rating action follows the North Gauteng High Court’s decision on 28 April 2012 to block the implementation of electronic tolling on the country’s largest toll road, the Gauteng Freeway Improvement Project (GFIP), pending a final court resolution on the matter.
This interdict supersedes the South African government’s 26 April 2012 decision to postpone e-toll collections by one month and adds uncertainty on the future of this controversial toll road project.
“The delay in GFIP e-toll collection adds pressure on SANRAL’s finances and raises concerns over its medium-term financial sustainability,” said Kenneth Morare, Moody’s lead analyst for SANRAL.
Moody’s noted that public opposition had already led the national government to postpone the implementation of e-toll collections to 30 April 2012 from June 2011.
More recently, the government agreed on a significant reduction in e-toll rates, in return for which the authorities extended a R5.8 billion budget allocation. Thus far, the delayed implementation of e-tolls has resulted in revenue losses of approximately R2.7 billion for SANRAL, which is a sizable 40% of its estimated 2012 annual budget.
These losses will grow by an estimated R100 million each month that the delay continues and will gradually erode the company’s cash buffer.
Moody’s noted further that SANRAL incurred R20 billion in debt (of which approximately 50% is guaranteed by the South African government) to finance the GFIP project and that the e-toll revenues are essential to it servicing this debt and absorbing the concomitant operating costs.
The GFIP is responsible for most of the rapid increase in SANRAL’s debt stock to its current level of R39.7 billion, or a high six-times its 2012 estimated annual revenue.
“We believe that SANRAL’s high gearing and uncertainties over e-tolling issues could make it difficult for the company to debt-finance the operating deficits resulting from its loss of e-toll revenue” added Mr. Morare.
The negative outlook reflects firstly SANRAL’s weakening financial conditions over the medium term and the inherent operational risks associated with the e-tolling system and, secondly, concerns over South Africa’s deteriorating operating environment, as reflected by the negative outlook on South Africa’s A3 government bond ratings, Moody’s statement said.
Stabilisation of SANRAL’s ratings will require stabilisation of South Africa’s government bond ratings, as well as a positive resolution of the GFIP issue leading to a stabilisation of SANRAL’s financial position and prospects, it continued.
Conversely, SANRAL’s ratings could come under pressure in the event of an unfavorable resolution of the GFIP toll issue, resulting in a further material deterioration of the company’s financial metrics and cash flows, and/or a downgrade of South Africa’s government bond rating, the firm said.