South Africa’s Biggest Debt Manager Halts Loans to State Firms
- 31 August 2016
- 4 min read
Africa’s biggest private fixed-income money manager will stop lending money to six of South Africa’s largest state companies because it’s concerned about how they are being run, government infighting and threats to the independence of the finance ministry.
Author: Mike Cohen | Source: Bloomberg | Date 31/08/2016
Futuregrowth Asset Management, which has about 170 billion rand ($11.7 billion) in assets, shelved plans to lend more than 1.8 billion rand to three state companies on Tuesday, Chief Investment Officer Andrew Canter said by phone from Cape Town on Wednesday, without giving more detail. The fund manager will only resume offering loans and rolling over existing debt once it has determined that what it sees as proper oversight and governance at the companies have been restored.
The companies are power utility Eskom Holdings SOC Ltd., rail and ports operator Transnet SOC Ltd., South African National Roads Agency SOC Ltd., the Land Bank of South Africa, the Industrial Development Corp. of South Africa and the Development Bank of Southern Africa. The decision won’t immediately affect lending to the government and other state bodies such as water boards and municipalities.
“We’ve observed recent reports that strongly hint of conflict between branches of South Africa’s government, the possible machinations of patronage networks and a seeming challenge to the National Treasury’s independence,” Canter said. “Any material risk to the state-owned entities’ governance, budgeting and approval processes for spending or lending must impact on our forward-looking credit assessments. It is difficult to make reasoned and defensible decisions to continue providing state-owned companies with additional funding using clients’ money.”
The rand fell 1.4 percent to 14.7099 per dollar at 2:49 p.m. in Johannesburg and headed for the weakest closing level since July 7, while yields on the government’s benchmark bonds reversed an earlier drop to rise 2 basis points to 9.01 percent. The yield on Eskom’s $1.25 billion of Eurobonds due Feb. 2025 rose 28 basis points to 7.15 percent.
Junk Rating
The move comes as Finance Minister Pravin Gordhan battles with President Jacob Zuma and the management of state companies over board appointments and spending plans. The government announced last week that Zuma will lead a new panel to oversee all state-owned companies to ensure they help develop the country -- a role previously delegated to Gordhan and other ministers. That decision lacks clarity and context and creates uncertainty about who the companies will answer to, according to Canter.
Should other asset managers follow Futuregrowth, it will increase the state companies’ borrowing costs and make it harder for them to finance plans to spend billions of rands on new infrastructure. The Treasury may also come under increased pressure to directly fund them and grant additional debt guarantees at a time when the economy is stagnating and it’s seeking to rein in the budget deficit to protect the country’s investment-grade credit rating.
S&P Global Ratings and Fitch Ratings Ltd., which place South Africa’s debt at one level above junk, have raised concerns that state-owned companies aren’t being managed optimally. Government debt guarantees to state companies totaled 467 billion rand at the end of March, according to the Treasury.
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