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Rating Action:

Moody's downgrades ratings of nine South African regional governments and two government-related entities

10 Nov 2014

Actions follow the weakening of the South African government's credit profile

Johannesburg, November 10, 2014 -- Moody's Investors Service has today downgraded by one notch the long-term issuer ratings of nine South African regional and local governments (RLGs) and two government-related entities. Moody's has assigned stable outlooks on the ratings, except for Mbombela. The full list of affected ratings can be found at the end of this press release.

Moody's also affirmed the long-term issuer rating of Nelson Mandela Bay at A1.za and changed its outlook to stable from negative, and affirmed the long-term issuer ratings of Bergrivier Municipality and of the South African National Road Agency (SANRAL) at Baa3.za/P-3.za and Baa3/P-3 A3.za/P-2.za, respectively.

Today's rating actions were prompted by the deterioration of South Africa's credit profile as captured by Moody's recent downgrade of its government bond rating to Baa2 from Baa1, and its outlook change to stable from negative on 6 November. For full details, please refer to the press release: https://www.moodys.com/research/--PR_312007

In addition, Moody's affirmed the short-term issuer ratings of the cities of Cape Town, Ekurhuleni and Johannesburg at P-1.za, and affirmed the short-term issuer rating of the City of Tshwane at P-2.za.

RATINGS RATIONALE

-- DOWNGRADES OF NINE REGIONAL AND LOCAL GOVERNMENTS, EAST RAND WATER CARE COMPANY AND CITY POWER -- JOHANNESBURG

Moody's downgraded all metropolitan cities' long-term ratings by one notch, with the exception of Nelson Mandela Bay (see below for further details), to reflect the deterioration of South Africa's credit profile as captured by Moody's recent downgrade of South Africa's government bond rating to Baa2 (stable) from Baa1 (negative). The short-term ratings remained unaffected.

The centralised nature of the local public sector results in close operational and financial linkages between the national government and municipalities. Large cities are exposed to the country's macroeconomic performance and socio-economic conditions to varying degrees, while small-to-medium-sized municipalities are highly reliant on government transfers for operations and capital investments.

And while metropolitan cities rated by Moody's display comparatively rich economic bases, sound financials and good governance practices, they remain dependent on decisions of the central government, which maintains a high degree of control over the sector via legislation. Furthermore, the cities' budgetary structures and relative sizes heavily exposes them to the country's macroeconomic performance and socio-economic conditions. In addition, they feature moderate-to-high debt levels, which adds rigidity to their budgets.

Moody's expects that weaker-than-anticipated economic growth prospects in the medium term will put pressure on the cities' overall financial performances. Lower GDP growth will continue to impact municipal revenue and Moody's also expects these large cities -- which together account for well over 25% of the country's population -- to continue to register high demand for welfare benefits and infrastructure.

Similar to metropolitan cities, the medium-to-large local municipalities of Rustenburg, KwaDukuza, Mbombela, Amathole District and uMgungundlovu District are also exposed to the country's deteriorating economic environment through lower revenue growth. Moreover, volatile budget results, resulting from less sophisticated budget planning are a major factor behind most of the ratings being lower than those of metropolitan cities. Moody's also expects that infrastructure backlogs will put pressure on these municipalities' finances.

The downgrades of East Rand Water Care Company (ERWAT) to A3.za from A2.za and City Power -- Johannesburg to A2.za from A1.za mirror the downgrades of their respective parent municipalities, the City of Ekurhuleni and the City of Johannesburg. ERWAT's rating also takes into account its lingering liquidity pressure and the company's expectation for a substantial increase in debt levels.

With the exception of the local municipality of Mbombela, Moody's has assigned stable outlooks on the aforementioned governments' and government-related entities' ratings, in line with the outlook on the sovereign bond rating. Mbombela's negative outlook reflects the municipality's prolonged weak liquidity profile and volatile operating balances.

- NELSON MANDELA BAY'S RATING AFFIRMED, OUTLOOK CHANGED TO STABLE

The rating affirmation and outlook change reflect Nelson Mandela Bay's (1) lack of borrowing plans over the next three years; (2) low debt-to-operating revenue, which is projected to reach 15% in 2016, which is at the lowest level relative to rated metropolitan municipalities; (3) Moody's expectation for debt-to-operating revenue to be in line with those of Cape Town and Ekurhuleni in 2014, while the latter two are projected to moderately increase their debt in the medium term; and (4) the city's improvement in its liquidity profile in 2014, which compares well with those of Cape Town and Ekurhuleni.

- RATINGS OF BERGRIVIER AND SANRAL AFFIRMED

The rating affirmation of the municipality of Bergrivier at Baa3.za/P-3.za reflects greater tolerance to sovereign credit deterioration as its ratings are lower than the sovereign ratings. Bergrivier's rating affirmation also reflects Moody's expectation for a continuously positive gross operating balance, a slight decrease in the municipality's currently high debt-to-revenue ratio and a consistently sound liquidity position.

The affirmation of SANRAL's rating, which was lower than the sovereign ratings, reflects our expectation that grant funding for non-toll roads will increase substantially in the medium term, as its mandate recently expanded after the national government transferred some additional provincial roads to SANRAL.

WHAT COULD CHANGE THE RATINGS UP/DOWN

A further weakening of the South African sovereign credit profile could lead to downward adjustments in the ratings of RLGs and government-related companies. Additionally, financial difficulties resulting in cash flow tensions and consistently high or growing debt levels could lead to downward rating actions independent from sovereign rating movements.

Upward rating pressure to the ratings of RLGs and government-related companies could result from the strengthening of the sovereign credit profile. Evidence of a given entity's ability to display comparatively stronger credit fundamentals and an ability to withstand the deterioration of the operating environment could also exert upward rating pressure.

AFFECTED RATINGS (South African national scale)

- City of Cape Town: long-term issuer and debt ratings downgraded to A1.za from Aa3.za with stable outlook; short-term issuer rating of P-1.za affirmed

- Ekurhuleni, Metropolitan Municipality: long-term issuer and debt ratings downgraded to A1.za from Aa3.za with stable outlook; short-term issuer rating of P-1.za affirmed

- City of Johannesburg: long-term issuer and debt ratings downgraded to A2.za from A1.za with stable outlook; short-term issuer rating of P-1.za affirmed

- City of Tshwane: long-term issuer rating downgraded to A3.za from A2.za with stable outlook; short-term issuer rating of P-2.za affirmed

- Nelson Mandela, Metropolitan Municipality: long-term issuer rating A1.za affirmed; stable outlook

- East Rand Water Care Company (ERWAT): long-term issuer rating downgraded to A3.za from A2.za; stable outlook

- City power Johannesburg: long-term issuer rating downgraded to A2.za from A1.za with stable outlook

- Rustenburg, Municipality of: long-term issuer rating downgraded to A3.za from A2.za with stable outlook

- Mbombela, Municipality of: issuer rating downgraded to Baa1.za from A3.za; outlook remains negative

- KwaDukuza, Municipality of: long-term issuer rating downgraded to Baa2.za from Baa1.za with stable outlook

- Amathole, District Municipality of: long-term issuer rating downgraded to Baa1.za from A3.za with stable outlook

- uMgungundlovu, District Municipality of: long-term issuer rating downgraded to Baa3.za from Baa2.za with stable outlook

- Bergrivier, Municipality of: long-term issuer rating of Baa3.za/P-3.za affirmed with stable outlook

South African National Roads Agency: Baa3/P-3 (Global scale, local and foreign currency) and A3.za/P-2.za (South African national scale affirmed with stable outlook

The principal methodology used in rating South Africa RLGs was Regional and Local Governments published in January 2013. The principal methodology used in rating South Africa GRIs was Government-Related Issuers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies

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 June 2014 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings".

REGULATORY DISCLOSURES

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

The ratings have been disclosed to the rated entities or their designated agent(s) and issued with no amendment resulting from that disclosure.

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

Glossary: this press release contains within the main body of the text definitions of any defined terms or acronyms used within it. Moody's various ratings symbols, rating scales and other ratings-related definitions can be found in the MIS Rating Symbols and Definitions guide at www.moodys.com.

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

2. This rating action was based solely on the merits of the obligor(s) or instrument(s) being rated.

3. This rating action was an independent evaluation of the risks and merits of the obligor(s) or instrument(s) assessed in this rating action and is subject to the potential limitations of the credit rating disclosed with this rating action.

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 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
SUBSCRIBERS: 44 20 7772 5454

David M Rubinoff
MD - Sub-Sovereigns
Sub-Sovereign Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 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
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades ratings of nine South African regional governments and two government-related entities
No Related Data.
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