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Rating Action:

Moody's downgrades SANRAL's long term local and foreign currency ratings to Ba2, outlook changed to negative

29 Jun 2018

Johannesburg, June 29, 2018 -- Moody's Investors Service has today downgraded to Ba2 from Ba1 South African National Roads Agency Ltd (The) (SANRAL) long-term local and foreign currency global scale ratings, outlook changed to negative. Moody's also affirmed the short term global scale of (Not Prime) NP. Concurrently, Moody's also downgraded the long term national scale rating to A1.za from Aa3.za and affirmed the short term national scale rating of P-1.za. This action concludes the review that was initiated on 28 November 2017.

Today's rating action reflects SANRAL's ongoing liquidity pressure which is exacerbated by the national government's decision to further delay its announcement on the long-term solution to SANRAL's Gauteng Freeway Improvement Project (GFIP) funding model. The final decision on the long-term funding plan - which was expected at the end of May 2018 - has been postponed to the end of July 2018.

RATINGS RATIONALE

The announcement by the national government that it will review the long-term funding model for the GFIP prompted SANRAL's management not to issue any new debt until the national government finalizes its decision on the future of the GFIP funding model. This decision further weakened SANRAL's liquidity profile. Moody's acknowledges the government decision taken in March 2018 to approve an un-earmarked additional transfer of ZAR1.9 billion to SANRAL to fund the GFIP project. However, SANRAL still needs a further ZAR3.9 billion until 31 March 2019 to be able to honor all its commitments, including the redemption of the NRA18 bond of ZAR2.4 billion maturing in November 2018. The lack of timely government support has increased the GFIP's operational risks and has created uncertainty on the future of the open road tolling model.

SANRAL's Ba2 rating is supported by its very strong operational and financial linkages with the national government. The agency is 100% owned by the national government, represented by the Department of Transport as the sole shareholder. From a credit risk perspective, SANRAL's credit profile, its strengths as well as its weaknesses is derived entirely from its relationship with the South African government because of the close operational and financial links between the two. As a result, SANRAL's rating is derived from the application of our approach to Government Related Issuers (GRIs) and is rated solely on support with two notches below its support provider, the South Africa Government (Baa3, stable). The rating is also supported by explicit guarantees from the support provider of 77% of guaranteed debt as well as a cross default clause on its 23% non-guaranteed debt.

The national government exercises tight control over SANRAL's operations. The agency receives regular transfers from the government for the non-toll road network under management, which accounted for 62% of its total revenue in FY2017. Other toll revenue accounted for 22%, while only 16% of total revenue related to the GFIP. The shareholder approves the appointment of the agency's management and board of directors, decides on tariff adjustments, and approves borrowing limits and future project plans. SANRAL plays a critical role in South Africa's road infrastructure development. Its main mandate is to expand and maintain the national road network on behalf of the national government. Moody's believes that SANRAL will continue to enjoy a very high degree of government support.

NEGATIVE OUTLOOK

The negative outlook reflects uncertainty over whether the national government will be able to introduce a long-term viable funding model for the GFIP. It also reflects uncertainty over whether SANRAL will be able to honor its financial commitments, including the upcoming redemption in November of ZAR2.4 billion.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward rating pressure is unlikely considering the negative outlook. SANRAL's rating could be stabilized if the national government is able to resolve the GFIP long-term funding model in such a way that the agency will be able to honor all its financial commitments. SANRAL's rating could be downgraded if the national government further delays its decision on the future of the GFIP funding model and is unable to approve any financial support as an emergency measure to improve SANRAL's GFIP cash flow requirements.

The principal methodology used in these ratings was Government-Related Issuers published in June 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".za" for South Africa. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in May 2016 entitled "Mapping National Scale Ratings from Global Scale Ratings". While NSRs have no inherent absolute meaning in terms of default risk or expected loss, a historical probability of default consistent with a given NSR can be inferred from the GSR to which it maps back at that particular point in time. For information on the historical default rates associated with different global scale rating categories over different investment horizons, please see https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1113601.

Glossary of Terms and Acronyms

REGULATORY DISCLOSURES

The rating for 820031729, NSR LT Issuer Rating, ISSUER RATING, ZAR of South African National Roads Ag. Ltd (The) was initially assigned on 01 Feb 2007 and the last Credit Rating Action was taken on 12 Jun 2017.

The rating for 820031729, NSR ST Issuer Rating, ISSUER RATING, ZAR of South African National Roads Ag. Ltd (The) was initially assigned on 01 Feb 2007 and the last Credit Rating Action was taken on 12 Jun 2017.

The rating for 820031729, LT Issuer Rating, ISSUER RATING, ZAR of South African National Roads Ag. Ltd (The) was initially assigned on 27 Aug 2009 and the last Credit Rating Action was taken on 28 Nov 2017.

The rating for 820031729, LT Issuer Rating, ISSUER RATING of South African National Roads Ag. Ltd (The) was initially assigned on 27 Aug 2009 and the last Credit Rating Action was taken on 28 Nov 2017.

The rating for 820031729, ST Issuer Rating, ISSUER RATING, ZAR of South African National Roads Ag. Ltd (The) was initially assigned on 27 Aug 2009 and the last Credit Rating Action was taken on 12 Jun 2017.

The rating for 820031729, ST Issuer Rating, ISSUER RATING of South African National Roads Ag. Ltd (The) was initially assigned on 27 Aug 2009 and the last Credit Rating Action was taken on 12 Jun 2017.

Only credit rating actions issued by Moody's Investors Service South Africa (Pty) Ltd are considered for the purpose of this disclosure.

Please see the ratings tab on the issuer page on www.moodys.com for additional rating history details. The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's provides a date that it believes is the most reliable and accurate based on the information that is available to it.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. On this basis, these rated entities or their agent(s) are considered to be participating entities. The rated entities or their agent(s) generally provide Moody's with information for the purposes of their ratings process.

The main assumptions underlying the methodology used to determine the credit ratings are :

1) Expected future trends for the relevant industry(ies) structure, competitive dynamics, supply & demand, regulatory environment, and technology are assumed to be predictive for the likelihood of default and expected loss.

2) Expectations for competitive/market position and management's capabilities and approach to business and financial risks are assumed to be predictive for the likelihood of default and expected loss.

3) Indicators for profitability, interest coverage, and asset quality are assumed to be predictive for the likelihood of default and expected loss, and the rating category criteria are believed to be appropriate.

4) Indicators for cash flow generation, leverage, and debt coverage are assumed to be predictive for the likelihood of default and expected loss, and the rating category criteria are believed to be appropriate.

5) Expectations for legal, regulatory, liquidity, and financial market risks, mergers/acquisitions and recapitalization events, integrity of financial reporting, corporate governance, and the likelihood and nature of support or weakening influence from a parent, affiliate, government or financial party are assumed to be predictive for the likelihood of default/expected loss.

Information sources used to prepare the ratings are the following: parties involved in the rating, public information, and confidential and proprietary Moody's information.

Information types used to prepare the include the following: Financial data, Economic and demographic data, Public information, and Moody's information.

Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable, including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process. The information available and considered in determining the credit rating is of appropriate quality relative to that available for similar obligors, securities or money market instruments.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating. Moody's adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources Moody's considers to be reliable including, when appropriate, independent third-party sources. However, Moody's is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

The ratings have been disclosed to the rated entities prior to public dissemination.

Credit ratings are Moody's current opinions of the relative future credit risk of entities, credit commitments, or debt or debt-like securities rated by Moody's. Moody's defines credit risk as the risk that an entity may not meet its contractual, financial obligations as they come due and any estimated financial loss in the event of default. Credit ratings do not address any other risk, including but not limited to: market liquidity risk, market value risk, or price volatility. Credit ratings are not statements of current or historical fact. Credit ratings do not constitute investment or financial advice, and credit ratings are not recommendations to purchase, sell, or hold particular securities. Credit ratings do not comment on the suitability of an investment for any particular investor. Moody's issues its credit ratings with the expectation and understanding that each investor will make its own study and evaluation of each security that is under consideration for purchase, holding, or sale.

The volatility for the credit ratings for South African National Roads Ag. Ltd (The) is:

1) An entity's competitive position is expected to be stable over the 18 -- 24 month rating horizon and generally will not lead to rating volatility. Unexpected changes in technology, regulation, market participants or consumer preferences that negatively (or positively) impact an entity's competitive position within its market, may lead to multiple notch ratings changes during the course of the ratings horizon.

2) Operating strategy effectiveness is typically evidenced by an entity's performance metrics over the medium to long term, typically beyond the rating horizon, and generally will not lead to rating volatility. Changes in performance metrics during the 18-24 month rating horizon will not generally lead to high degrees of rating volatility (more than 1 rating notch). Sustained improvement or deterioration in performance metrics beyond Moody's expectations could lead to multi notch rating changes.

3) Rating levels are highly sensitive to financial strategy. Material changes to financial strategy which increase or decrease financial risk and liquidity may change the entity's ability to weather financial and business cycles. A change in appetite for financial risk may lead to multi-notch downward rating changes. Changes in financial strategy which reduce risk are likely to lead to single notch upward rating changes during the rating horizon.

4) Rating levels can be sensitive to changes in assumptions about an entity's financial position. Metrics that measure financial position tend to vary within a range of expected levels during the course of an 18 -- 24 month rating horizon, and modest variances are not expected to lead to multi-notch rating changes. Large, unexpected changes to assumptions regarding financial position, including measures related to financial leverage, liquidity, and resources available to meet financial obligations, may trigger multi-notch rating changes over the ratings horizon.

5) Rating levels can be greatly impacted by changes in governance structure. Enterprise governance is expected to be stable during and beyond the rating horizon, and therefore not cause volatility in ratings. Material changes in governance, ownership structure, or support to or from other entities are likely to lead to multi notch rating changes.

The sensitivity to assumptions for the credit ratings are:

1) Moody's assumptions about the entity's competitive position within its business sector are presumed to remain stable over our rating horizon (18-24 months). Factors that can affect the entity's competitive position include changes in market share over time; disruptive pricing affecting either a) customer demand or b) the cost of supplying goods or services; new market entrants; barriers to entry of new competitors; or product substitution. If Moody's assumptions of competitive position are inaccurate, and the entity experiences forces which are expected to lead to sustained improvement or degradation in competitive position for the longer term, this may cause ratings to move upwards or downwards, depending on the speed of change and the entity's ability to react to the change. Examples include changes in energy or commodity prices, reduced demand for a facility do to a change in service level, or less demand for an enterprise due to slowing economic conditions. Examples include a spike in the price of a commodity that a power plant relies on to generate its power or the loss of connecting passenger service at a hub airport.

2) Moody's assumes that an entity's business profile, which incorporates its operating strategy, will evolve slowly, and is therefore unlikely to lead to rating changes over the 18 -- 24 month rating horizon. Business profile captures fundamental differences between entities in the same sector. An entity's overall business profile incorporates expectations of volatility in revenue and earnings; the perceived strength of the entity's position in its market; and characteristics of its product offering, such as differentiation with competitive offerings and proven adoption by customers. Operating strategy encompasses decisions regarding the entity's supply chain and distribution channels; decisions regarding outsourcing production versus operating production facilities; directing growth capital towards acquisitions rather than internal development; or divesting a stable but mature business for one which is believed to offer greater future growth at the cost of higher near-term investment. Ratings are sensitive to differences in business profile. For example, higher levels of product, segment or geographic diversification are generally a positive factor which is likely to reduce volatility in sales and earnings. The entity's degree of vertical integration has mixed considerations for ratings; vertical integration provides greater control over sourcing and distribution, but also creates a higher level of fixed costs which may be a burden during periods of cyclical declines. An entity's business profile will change slowly, generally due to strategic decisions which are executed in the long term, and therefore will rarely be the source of short term rating changes. If there is an unexpected change in business profile, such as a decision to add or divest business segments or enter new markets within a short period of time, it could result in rating changes of one or more notches to reflect the new view of risk and opportunities over the rating horizon.

3) Moody's ratings include assumptions about financial strategy and financial policy over the next 18 -- 24 months. Assumptions include management's appetite for debt incurrence and financial leverage; planning for debt maturities; management's decisions regarding deployment of capital; and deployment of profits (shareholder returns vs. investment in the business). Examples of changes to financial policy may be in the form of a shift in dividend policy; a change in how to finance seasonal working capital or manage timing of payables; or decisions of how much cash to hold in reserves to soften the impact of business cycles. Financial strategy is generally stable over the rating horizon. Unanticipated changes to a company's financial strategy, which may be accompanied by significant changes in financial leverage or capitalization, may lead to rating changes of one or more notches upwards or downwards.

4) Moody's assumptions about the entity's governance structure within its market(s) are generally stable over our rating horizon (18-24 months). Factors affecting governance include changes in ownership or control of the entity's operational and strategic decision making; support provided to, or received from, other corporate or government entities; the strength and independence of management; and participation in mergers, acquisitions or divestitures. Changes to an entity's governance are rare but could result in multi-notch rating changes as it could positively or negatively impact the entity's future operating strategy and financial position. Governance changes are common at the time of a sale or leveraged buy-out of a company, due to a change in financial policies which are expected to be adopted by the new owners. For example, expectations are that a sale to a financial buyer will be accompanied by financial policies which are associated with a higher risk profile. These types of transactions generally result in ratings being lowered by multiple notches at the time of the transaction. Conversely, a sale to a buyer (either company or investor) or an initial public offering of stock is associated with more benign financial policies, and may lead to an upgrade of one or more notches at the time of the sale.

5) Moody's ratings include assumptions about this entity's financial position, as measured by financial metrics, over the next 18 -- 24 months. Assumptions include the entity's anticipated earnings levels, operating expenses, interest rates paid on debt, and cash flow generation, all of which contribute to an entity's financial metrics. These measures may be impacted by unanticipated expenses, changes to interest rate levels, tax changes or business decisions that change expenditure or capital levels. Modest changes to financial metrics over short periods are typical within most companies and industries. Ratings are not generally sensitive to modest changes in financial metrics which are due to expected business cycles or economic cycles and which are not seen as affecting an entity's long term viability or business profile. However, expectations that an entity's financial metrics are likely to change meaningfully (either positively or negatively) for a longer term could lead to rating changes of one or more notches upwards or downwards. Examples that are common among all industries include one-time debt-funded share buybacks of significant size, which increase debt and cause leverage ratios to remain at higher levels than previously expected into the future. Rating downgrades of one or more notches are common in response to these scenarios.

Please see Moody's Rating Symbols and Definitions on the Ratings Definitions page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Moody's credit ratings are opinions of the relative credit risk of financial obligations translating into an ordinal ranking of issuers and financial obligations across asset classes and geographies. As such, no absolute probability of default nor expected loss given default is assigned to each individual credit rating. Please refer to the following link for an index of Moody's default studies. Guides to Moody's Default Research.

Please see Moody's Rating Symbols and Definitions on the Ratings Definitions page on www.moodys.com for further information on the time horizon in which a credit rating action may be expected after a review or outlook action took place.

I hereby attest, as a person with responsibility for this Credit Rating Action, that to the best of my knowledge, based on (i) my participation in the rating committee that determined to take this Credit Rating Action, (ii) any materials I have reviewed in connection with the rating committee, and (iii) the attestations I have received from other members of the rating committee:

1) No part of this Credit Rating Action was influenced by any other business activities of Moody's Corporation-- i.e., this Credit Rating Action was not affected by the existence of, or potential for, other business relationships between Moody's Investors Service or its affiliates and the Rated Entity or its affiliates, or the non-existence of any such relationships;

2) This Credit Rating Action was based solely on the merits of the obligor(s), security(ies) or instrument(s) being rated; and

3) This Credit Rating Action was an independent evaluation of the credit risk of the obligor(s), security(ies), or instrument(s) assessed in this Credit Rating Action and is subject to the potential limitations of the Credit Rating disclosed with this Credit Rating Action.

Massimo Visconti, VP-Sr Credit Officer

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Daniel Mazibuko
Associate Lead Analyst
Sub-Sovereign Group
Moody's Investors Service South Africa (Pty) Ltd.
The Forum
2 Maude Street
2196 Sandton
Johannesburg
South Africa
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

David Rubinoff
MD - Sub Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service South Africa (Pty) Ltd.
The Forum
2 Maude Street
2196 Sandton
Johannesburg
South Africa
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2018 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.