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TEXT- Fitch affirms South African Industrial Development Corp
November 8, 2012 / 3:03 PM / 5 years ago

TEXT- Fitch affirms South African Industrial Development Corp

(The following statement was released by the rating agency)

Nov 8 - Fitch Ratings has affirmed South African Industrial Development Corporation’s (IDC) National Long-term rating at ‘AA(zaf)’ and Short-term rating at ‘F1+(zaf)'. The Outlook is Stable. IDC’s ratings continue to reflect the South African (SA) government’s full ownership and extensive control, its high budgetary flexibility and capitalisation and its key role in national development strategy. The ratings also consider IDC’s large debt-funded investment plan, which could potentially weigh on its future asset quality. A dilution of the SA government’s oversight or financial support in case of material deterioration of IDC’s asset classes could prompt negative rating action. Conversely, positive rating action could result from more formalised support from the SA government, such as an explicit guarantee of all financial liabilities. IDC’s asset quality is deteriorating, as evidenced by the upward trend of impairments, which had reached ZAR6.8bn or 18% of the financing book at March 2012, from 12% in 2008. However, Fitch notes that the ratio significantly decreases to 6% if the financing book is considered at fair value. Fitch views IDC’s ability to control its growing risk profile as a key challenge, especially in the context of persistently high unemployment (25%), sluggish GDP growth, which Fitch expect to be about 2.5% in 2012-2013, and a government requirement to increasingly focus on labour-intensive sectors. The growing social tensions in the country could potentially increase IDC’s exposure to SA’s key industries, especially mining and related sectors, weighing on the financing book’s structure, which already shows high sector concentration and a large exposure to single names, with the ten largest counterparties accounting for 65% of total assets. However, this risk is largely mitigated by the presence of a high share of valuable listed equities - chiefly companies operating in the commodity sector- whose market value of ZAR56bn at March 2012 accounted for around 50% of total assets. This portfolio gives IDC significant financial flexibility, as it could be relatively easily disposed of in case of need. The steady mark to market growth of this portfolio over 2007-2012 has largely contributed to strengthening IDC’s capital base to ZAR92bn (ZAR65bn in 2009). However, Fitch expects the current drop in commodity prices to reduce the revaluation component of IDC’s equity in 2013-2014. Lower commodity prices should also reduce large, albeit volatile, dividends from equity investments (ZAR3.4bn in 2012), which sustained IDC’s income statement, allowing it to favourably price loans to strategic and labour-intensive sectors. Despite lower dividends and diminishing net interest margin, Fitch expects IDC to continue delivering a solid, albeit declining, net profit of around ZAR1bn on average in 2013-2017. To comply with the government mandate and sustain the economy and employment, IDC budgeted around ZAR90bn of new advances by 2017, with debt up to ZAR40bn, from ZAR10bn currently. However, most projects needing finance are still in an early stage of development or unidentified. Under Fitch’s scenario, lower-than-budgeted advances will cap IDC’s debt at ZAR 35bn and the debt/equity ratio at 40% (currently at 12%). To cover its increased funding needs, IDC plans to complement its traditional source of funding - loans with development financing institutions and banks - with growing access to the capital markets. It launched a ZAR15bn DMTN programme in 2010. This will diversify the funding mix but could expose IDC to the cyclicality of financial markets. Fitch expects the company to maintain sound liquidity to cushion the growing balance sheet and debt. A full rating report will be shortly available at (Caryn Trokie, New York Ratings Unit)

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