Moody s approach to rating subsovereigns DANIEL MAZIBUKO, ASSOCIATE ANALYST

Transcription

1 Moody s approach to rating subsovereigns DANIEL MAZIBUKO, ASSOCIATE ANALYST 14 JULY 2016

2 Agenda 1. RLGs Global presence 2. Moody s approach to rating government-related issuers (GRIs) 3. Moody s approach to rating regional & local governments (RLGs) 4. Lessons learnt from African issuers active in the bond market 2

3 1 RLGs Global Presence 3

4 Global Presence» 47 analysts/associates» Staff located in 13 offices world-wide to serve our clients and the market» 16 different nationalities speaking 17+ languages Toronto London Madrid Frankfurt Prague Milan Moscow Beijing Tokyo Mexico City Buenos Aires Johannesburg Sydney 4

5 Rating Universe: A Wide Array of Public Entities Two Big Families: RLGs, GRIs Housing Associations Utilities Provinces Regions Transportation Specialised Lenders Regional and Local Governments (RLGs) Water Governmentrelated Issuers (GRIs) Financial Institutions Cities States Healthcare Higher Education Not for Profit 5

6 RLG Ratings Universe by Geography Credits Spread Over 39 Countries» Strong presence in Canada and Africa Australia and Asia South America Mexico, W.Europe & CEE/CIS» Issuer ratings dominant vs. debt Western Europe ratings, capital mkt activity limited in many countries North America» National Scale Ratings widely used in Eastern Europe Mexico, CEE/CIS, South Africa and Turkey» Africa coverage is limited to South Africa 6

7 South African Rated Sub-Sovereigns (As at 11 May 2016) OUTLOOK GLOBAL SCALE NATIONAL SCALE RATING METROPOLITAN MUNICIPALITIES City of Cape Town Negative Baa2/P-2 Aaa.za/P1-za [1] Ekurhuleni Metro Negative Baa2/P-2 Aaa.za/P-1.za [1] Johannesburg Negative Baa2/P-2 Aa1.za/P-1.za [1] Nelson Mandela Metro Negative Baa2 Aa1.za City of Tshwane Negative Ba1/NP A1.za/ P-1.za Mangaung Negative Ba1/NP A1.za/P-1.za LOCAL MUNICIPALITIES Rustenburg Negative Ba1 A1.za Mbombela Negative Ba1 A2.za KwaDukuza Negative Ba2 A3.za Bergrivier Stable Ba3/NP Baa2.za/P-1.za Breede Valley Negative Ba1/NP A2.za/P-1.za DISTRICT MUNICIPALITIES Amathole District Negative Ba1 A2.za UMgungundlovu District Stable Ba3 Baa2.za GOVERNMENT RELATED ISSUERS (GRI S) City Power Johannesburg Negative Baa2 Aa1.za East Rand Water Care Company (ERWAT) Negative Baa3 Aa3.za South African National Roads (SANRAL) Negative Baa3/P-3 Aa3.za/P-1.za Notes: [1] Issuer and debt ratings. 7

8 2 Moody s approach to rating government-related issuers (GRIs) 8

9 What is a Government-Related Issuer (GRI)? 1 An entity with full or partial government ownership or control or a public policy mandate from the national or local government 2 Minimum 20% government ownership level 3 Sub Sovereign Group rates around 80 GRIs, in view of the close link with the relevant state/sub-national government 9

10 Joint Default Analysis (JDA) framework Under the Joint-Default Analysis (JDA) framework, Moody s ratings express: 1 The standalone credit risk profile of the GRI: Baseline Credit Assessment (BCA) 2 The intervention of the supporter government to prevent a default by the GRI (i.e. Extraordinary support) 3 The degree of financial/economic linkage between the issuer and its supporting government (i.e. Default dependence) 10

11 Joint Default Analysis (JDA) Framework Continued Baseline Credit Assessment The intrinsic or stand-alone risk of the GRI, in essence a bail-out risk rating» Benchmark to peers if available; incorporates recurring/predictable subsidies and transfers from the supporting government» Includes ordinary support from the government as well as relevant government-related risks such as loss of special charter, monopoly status, or punitive taxation» Published on a scale of aaa to c (where aaa corresponds to the lowest credit risk) 11

12 Joint Default Analysis (JDA) Framework Continued Extraordinary Support» Probability that a government owner would provide financial support, or other contractual protections» Major analytical factors Existence of guarantees Ownership level Barriers to support Government intervention Political linkages Economic importance of GRI» It can be either low (0-30%), moderate (31-50%), strong (51-70%), high (71-90%), very high (91-100%) 12

13 Joint Default Analysis (JDA) Framework Continued Default Dependence» Reflects the tendency of a GRI and its supporting government to be jointly susceptible to adverse circumstances that simultaneously move them closer to default» Scorecard-based analysis, to ensure international consistency» Major analytical factors Operational and financial linkages Reliance on overlapping revenue base Exposure to common credit risks» It can be either low (30%), moderate (50%), high (70%), very high (90%) 13

14 Joint Default Analysis (JDA) Framework Continued Analytical approach for GRIs Without a BCA Characteristics of such GRIs without a BCA, which are rated solely on support include: A very close and enduring alignment of interests and objectives Generally government agencies or entities wholly government-owned Very limited strategic or operational autonomy Standalone financial performance and metrics are essentially meaningless The GRI s default would substantially damage the governments own credit standing 14

15 3 Moody s approach to rating Regional & local governments (RLGs) 15

16 RLGs: The Approach 1 RLGs are enduringly linked to their respective sovereign. The sovereign s credit quality will to some extent anchor the credit quality of the RLG 2 As we move down the rating scale, we observe that credit risks for RLGs tend to align closer to sovereign credit risk, hence rating compression with the sovereign 3 Sovereign and sub-sovereign entities are more likely to be affected by similar external factors, or event risk. 16

17 RLGs: BCA and Extraordinary Support F1. Economic Fundamentals F2. Institutional Framework F3. Financial performance & Debt profile F4. Governance & Management Operating Environment (typically reflected in Sovereign bond rating) Assessment of idiosyncratic risk Assessment of systemic risk Baseline Credit Assessment RLG Rating Extraordinary Support Range 17

18 Assessing Idiosyncratic Risk Institutional Framework Financial performance & Debt profile Economic Fundamentals Governance & Management 18

19 Assessing Idiosyncratic Risk Why it matters Economic Fundamentals (20%)» An RLG's ability to service its debt depends on, among other factors, the sufficiency and reliability of its future revenues.» Relative economic performance will likely impact an RLG s ability to generate own-source revenues and its dependence on fiscal transfers. How it s measured in the scorecard» Regional GDP per capita as a percentage of national GDP per capita» Economic volatility is assessed by evaluating an RLG s economic diversity 19

20 Assessing Idiosyncratic Risk Continued Why it matters Institutional Framework (20%)» The institutional framework determines intergovernmental relations and shapes RLG powers and responsibilities.» It addresses the way in which these responsibilities and powers may be altered, whether by a higher tier entity or by the RLG itself. How it s measured in the scorecard» We gauge predictability, stability and responsiveness by assessing whether and how RLG powers and responsibilities may be altered in response to changing circumstances.» We gauge financial flexibility by evaluating own-source revenue flexibility and the RLG sector's spending flexibility 20

21 Assessing Idiosyncratic Risk Continued Why it matters Financial Performance & Debt Profile (30%)» Financial performance is the product of accumulated decisions of policy makers regarding an RLG s revenue structure and expenditure base» The government's debt profile includes the amount of debt, the burden it poses, its structure and composition» How it s measured in the scorecard» Ratio of gross operating balance to operating revenue» Ratio of interest payments to operating revenue» Cash and liquidity management» Debt burden & debt structure 21

22 Assessing Idiosyncratic Risk Continued Why it matters Governance and Management (30%)» Our assessment of a government's credit standing includes an assessment of the quality of financial decision-making.» How it s measured in the scorecard» Risk controls and financial management practices.» Investment and debt management policies and practices» Transparency and disclosure practices 22

23 Extraordinary Support assumptions 1 Extraordinary support is the likelihood that a higher-tier government would aid an RLG in the event that it faced acute liquidity stress 2 Support could take different forms, for example, a one-time cash infusion or any action facilitating negotiations with lenders that enhances access to interim financing for the RLG. 3 Extraordinary support is classified into five ranges: low (0% - 30%), moderate (31% - 50%), strong (51% - 70%), high (71% - 90%) and very high (91% - 100%). 23

24 4 Lessons learnt from African issuers active in the bond market (Cape Town, Johannesburg, Ekurhuleni and City of Tshwane) 24

25 Municipalities are Governed by Strong Legislations National Government Plays Key Oversight Role» Since 1994, the local government system in South Africa has been restructured and transformed in an effort to improve the coverage and quality of public service» In year 2000 the new demarcation process was completed and three spheres of municipalities were created» In 2003 the new Municipal Financial Management Act was implemented to govern and manage municipal operations» In 2004 the city of Johannesburg issued the first municipal bond and others follow later 25

26 Municipal Bond issuances have substantially increased 4 metros (CT, JHB, Ekurhuleni and Tshwane) have entered the debt capital market since 2004, registering a total of ZAR32 billion ($2.7 billion) DMTN program by 30 June These metros plan to spend $7.8 billion on capital investments in which represents a 23% increase from , borrowing will contribute 30% of the total Cumulative Bond Issuance (US$ Million) Source: Moody s calculations on issuers financials 26

27 US$ million Bond issuances add to diversification of funding sources The number of investors participating in the municipal bonds has increased 51% of the metros total debt is financed through bond issuances City of Johannesburg successfully redeemed ZAR2.6 billion ($236 million) through the sinking fund investment from 2010 to 2015 Total Debt as at 30 June Bonds Other loans Total Debt Source: 0 Moody s calculations on issuers financials Ekurhuleni Cape Town Johannesburg Tshwane Metro 27

28 US$ million Substantial increase in fixed assets for metros Four Metros budgeted to continue tapping debt capital market to diversify funding sources Access to funding has improved for South African municipalities in particular at metro level 3,000 New borrowings Capital Revenues Own funds Capital Expenditures 2,500 2,000 1,500 1, Source: Moody s calculations on issuers financials and Budget F 2017F 2018F 28

29 Percentage (%) Moderate debt levels despite increase in capital investments Net Direct and Indirect Debt/Operating Revenue 60.0 Cape Town Johannesburg City of Tshwane Ekurhuleni Metro F 2017F 2018F Source: Moody s calculations on issuers financials and budget 29

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31 Analytical Team South Africa Daniel Mazibuko Associate Analyst Tel daniel.mazibuko@moodys.com Sebastien Hay VP / Senior Credit officer Team Leader Tel sebastien.hay@moodys.com Mauro Crisafulli Associate Managing Director Tel mauro.crisafulli@moodys.com 31

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