SA Corporate Credit Outlook: Tough conditions, but strong potential
LONDON (Standard & Poor's) – Standard & Poor's said that it sees signs of change in the corporate lending landscape in South Africa, in a report published today, "Tough Conditions, Strong Potential: South African Corporate Credit Outlook."
Two major credit events over the last year have had a strong impact on the corporate creditworthiness debate in South Africa. The 2013 corporate bond default of about ZAR925 million ($92 million) after the liquidation of First Strut (Pty) Limited, a South African engineering company, and the 2014 failure of Africa Bank Ltd. (both not rated by Standard & Poor's) have firmly put the spotlight on credit trends in South Africa and the need to understand credit risk in a rapid changing market environment.
While South Africa has large equity, public sector debt, and foreign exchange markets, the market for corporate debt, in particular also for high-yield, non-investment grade issuers, has remained fairly small by international standards. South African corporates have been traditionally cash rich or relied on bank financing and the equity markets to fund their investments.
"We see signs of corporate treasurers' managing their companies' balance sheets more proactively, corporate capex starting to recover, and the implementation of the Basel III framework, which started in 2013 and continues up to 2019, that we expect will alter the corporate lending landscape in South Africa," said Konrad Reuss, Managing Director and South Africa Office Head at Standard & Poor's.
In particular Basel III could curtail banks' corporate lending or increase rates on corporate loans to better reflect banks' rising cost due to the required higher capital buffer.
"This could make it more attractive for corporate borrowers to tap into domestic capital markets which are supported by a large domestic investor audience of pension funds and asset managers," Mr. Reuss said.
The in-depth report looks at the economic and corporate credit outlook for South Africa, and includes a capital expenditure survey, at look at rating trends and outlooks, as well as analysis of various sectors and segments.
Among the topics covered in the report are:
- South Africa's corporate bond market has good growth potential, with Standard & Poor's rating only 19 companies out of an estimated 160-plus companies with annual revenue exceeding €50 million. Its development has for a long time been hampered by banks' excessive liquidity and lending appetite, but with Basel III on the horizon, this dynamic may change.
- The companies we rate have strong ratings underpinned by their size and market leadership positions.
- Financial leverage and policies tend to be generally more prudent for South African corporates in global comparison.
- Issuance volumes by South African corporates have plummeted so far in 2014 because investors have become concerned about weakened domestic economic conditions.
- South African corporates have a relatively high proportion of negative outlooks, reflecting slow demand growth on the back of sluggish GDP growth this year that we forecast at only 1.5%, high cost inflation, weak commodity prices, and shifting regulations.
- Following our sovereign downgrade in June 2014, our outlook on South Africa's rating is now stable.
- The fundamental change in global business conditions, with China's economy slowing and shifting to more consumption-led growth, and the prolonged slow recovery in Europe, both key end-markets for South Africa, suggest the need for structural reforms.