Picture: SUPPLIED
Picture: SUPPLIED

Ratings agency Fitch has downgraded state-owned arms manufacturer Denel’s long-term credit rating.

Fitch Ratings has downgraded Denel  national long-term rating to 'B(zaf)' from 'AA-(zaf)' and national short-term rating to 'B(zaf)' from 'F1+(zaf)'.

"Fitch has placed the ratings on rating watch negative,” the agency said in a statement Monday.

In its statement, Fitch said Denel’s downgrade was a result of evaluation of much weaker government support. “This has been exacerbated by the short-term nature of the capital structure, which has restricted liquidity and in turn has negatively impacted divisional abilities to deliver on operational projects,” Fitch said.

“Denel continues to benefit from sovereign support through the government's irrevocable and unconditional guarantee for R3.4bn of Denel's R4bn domestic medium-term notes. While this guarantee framework has now been extended to 29 September 2023, it has clearly not been sufficient to address operational requirements and debt funding remains overwhelmingly short-term in nature. However, the rating reflects the expectation of continuing timely government support in some form,” Fitch said.

It said a key driver of the downgrade is the continuing operational performance deterioration in the year to March 31  2018.

The agency said it will reassess its rating upon provision of tangible government support that addresses the debt amount and maturity and improves liquidity, allowing the resumption of normalised divisional operations.

The state-owned arms manufacturer recorded a loss of nearly R2bn in the past financial year. In the 2017-2018 financial year it suffered a net loss of R1.8bn on a 38% decline in revenue to R5bn from R8bn the previous year.

The new Denel board has been involved in an intensive clean-up campaign to deal with irregular transactions undertaken by previous management, who became entangled with Gupta-linked businesses.

phakathib@businesslive.co.za