IDC is managing risks after Moody’s downgrade
SOEs will find it harder to raise funds as the government’s ability, and willingness, to prop up state entities weakens
The Industrial Development Corporation (IDC) is watching its liquidity closely and managing any risks that may arise from its most recent credit rating downgrade, the state-owned development finance institution told Business Day.
The lender, which is geared to support industrial development, was downgraded along with the Development Bank of Southern Africa (DBSA) by Moody’s Investors’ Services last week, because the agency believes it less likely that the government would be able to support either entity if they ran into difficulty.
Though both are viewed as being among the stronger and more profitable state-owned entities (SOEs), analysts expect that they, along with other parastatals, will find it harder to raise funds as the government’s ability, and willingness to prop up state firms, weakens
But the IDC said it is managing its liquidity closely “to ensure continued delivery on the mandate while managing any risks that may arise from the downgrade”, adding that it is working closely with its funders in the implementation of its borrowing programme.
“It is a fact that our clients are taking strain as the impact of the pandemic and tepid economic growth takes root,” the IDC said.
As such it has created a range of Covid-19 funding interventions, including a R300m small, industrial finance distress fund to help its clients “offset the impact of myriad challenges they are faced with”.
Though Moody’s said the IDC has strong capital buffers in place, this was weighed up against its “high asset risks”.
According to Moody’s, these risks are the IDC’s high level of non-performing loans, which had risen to 30% of gross loans by March 2019, well before the pandemic set in; as well as its substantial equity portfolio, which accounts for almost 41% of its total assets. This “exposes IDC to significant market volatility and unrealised investment losses”, Moody’s said.
The IDC is, for instance, the third-largest Sasol shareholder, and the company’s shares have plunged more than 57% since the start of the year. The IDC is also faced with rising liquidity challenges, due to “increased risk aversion by institutional investors and the currently tight capital market conditions”, Moody’s said.
Conditions are likely to remain challenging for even strong SOEs that need to raise money in capital markets.
“Funding was already constrained for SOEs as fundamentals deteriorated and investors worried about an ever increasing supply of bonds,” Simon Howie, co-head of SA and Africa fixed income at Ninety One.
Lessons from Land Bank
The events surrounding Land Bank, a state-owned lender that defaulted on its debt in April, was a stark reminder that implied government support, is just that — implied, said Howie. “The government is taking a pragmatic approach with Land Bank. It is there to support, but not to bail out.”
In the supplementary budget, the Land Bank, which holds almost 30% of SA’s agricultural debt, received R3bn in emergency liquidity funding while its restructuring plans are being finalised.
“The DBSA and IDC will now find it even harder to fund,” said Howie. “Ratings agencies are merely confirming what investors already knew — the government should now be seen as a strong shareholder but SOEs need to be judged as stand-alone entities.”
The same is true for SOEs more widely, he added. In addition to the government’s indication that is will not bail SOEs out — “its actual ability to help is also under pressure,” said Howie
The state laid bare the effects the virus will have on its own finances in last week’s supplementary budget, which showed debt levels as a share of GDP rising to 81.8% in 2020, excluding any SOE debt that it guarantees.
“The ability for SOEs to access the large pools of cash in money markets and conservative bond and income funds has inevitably reduced as credit risk has increased,” he said.
On a more positive note, however, investors have a lot of liquidity and more limited choices as the number of issuers has reduced, he said: “There is thus pent up demand for strong SOEs that have good governance and strong management”.
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