Futuregrowth Manages to Win Over Some SOEs

DBSA has agreed to more transparent disclosure including on loans to politically exposed persons, and to better investor protection measures, Futuregrowth says.

Publication: Business Day | Date: 15/13/2017 | Author: Hilary Joffe

Asset manager Futuregrowth has succeeded in getting some state-owned enterprises (SOEs) to improve disclosure to investors and governance.

This follows a due diligence review the asset manager started, after it controversially halted new lending to the largest SOEs because of growing concern about governance and decision-making.

This comes as ratings agency S&P Global Ratings has again expressed concern about government guarantees to financially ailing SOEs, and the risk this could pose to SA’s sovereign credit rating.

S&P, which put SA’s sovereign credit rating on negative outlook in December 2015, will have to decide in 2017 whether to downgrade SA to subinvestment grade ("junk") status or return it to a stable rating.

Speaking at S&P’s annual credit conference in Johannesburg on Tuesday, Futuregrowth head of credit Olga Constantatos said Futuregrowth had been able to negotiate key improvements in public disclosure and legal documentation, after it undertook an in-depth due diligence of SOEs’ policies and how they were actually governed. That involved a team of eight analysts detailing engagements with SOEs’ boards and management teams.

The Land Bank had agreed to include a clause in its domestic medium-term note programme that allowed for investors to ask for repayment of their loans in the event of a change to the Land Bank’s shareholder ministry, which was currently the Treasury.

The Development Bank of SA (DBSA) had agreed to more transparent disclosure, including on loans to politically exposed persons, and to better investor protection measures, while the Industrial Development Corporation (IDC) would disclose directors’ dealings with the company.

The review came after Futuregrowth halted talks on R1.8bn worth of loans to three SEOs in August, and said it would suspend additional lending to the largest six SOEs, pending a review. The six were Eskom, Transnet, Sanral, the Land Bank, the IDC and DBSA.

On Tuesday, Constantatos said SA’s debt capital markets tended to have weak investor protection and very weak disclosure, and Futuregrowth was working to improve this. As a signatory to the Principles for Responsible Investment, it was important for Futuregrowth to ensure that capital was allocated in a responsible manner.

The 12 largest SOEs have R300bn worth of bonds in issue on SA’s debt capital markets, accounting for about 36% of the total nominal value of the market. In 2016, they issued more than R45bn worth of new debt on the market.

The jump in the value of bonds that Eskom in particular issued with government guarantees, was a growing concern for S&P.

S&P’s emerging markets sovereign credit analyst, Gardner Rusike, said use of government guarantees by Eskom had grown at a faster pace than the Treasury had expected, which meant that government debt and utilised guarantees would total 55.9% of GDP in 2017, compared to a projection of 54.5% a year ago. "This is a big issue for us and the contingent liabilities need to be contained so that they don’t impact the sovereign," Rusike said.

The government has made a total of R350bn in guarantees available to Eskom, to support its ailing balance sheet and enable it to borrow in the market. Eskom has now drawn down about R240bn of the facility. The higher-than-expected increase in government-guaranteed debt was presumably because of regulatory constraints on Eskom’s ability to raise revenue through tariffs, Rusike said.