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Rating Action:

Moody's takes action on South African sub-sovereign ratings following sovereign action

01 Oct 2012

Johannesburg, October 01, 2012 -- Moody's Investors Service has today downgraded the long-term ratings (South African national scale) of 13 South African sub-sovereign issuers, including 12 local governments and one government-related issuer (East Rand Water Care Company), and changed the rating outlook to negative from stable on another seven local governments in the country. Further to today's action, all sub-sovereign ratings in the country carry negative outlooks, in line with the sovereign rating.

Today's actions were prompted by the weakening of the South African government's credit profile, as captured by Moody's recent downgrade of South Africa's government bond rating to Baa1 from A3. For full details please refer to the Sovereign press release (http://www.moodys.com/research/Moodys-downgrades-South-Africas-government-bond-rating-to-Baa1-outlook--PR_256159).

Further to today's action, Moody's affirmed the issuer ratings of Baa2/P-3 (global scale, local and foreign currency) and A2.za/P-2.za (South African national scale), with a negative outlook, of the South African National Road Agency (SANRAL).

A detailed list of the issuers and ratings affected by this rating action is provided further below.

RATINGS RATIONALE

Moody's says that the deterioration in South Africa's sovereign creditworthiness affects South African sub-sovereign entities to varying degrees. The centralised architecture of the local public sector in South Africa establishes close operational and financial linkages between the national government and municipalities. Large cities and medium-sized municipalities are exposed to varying degrees to the country's macroeconomic performance and socio-economic conditions, whilst small municipalities feature high reliance on government transfers for operations and capital investments.

Moody's has today downgraded twelve South African municipalities that were previously positioned within the Aa2.za-A3.za rating range on the South African national scale by one rating notch each, mirroring the change in the sovereign rating. The ratings of Rustenburg and Amathole, at A2.za and A3.za respectively, have remained unchanged, reflecting their comparatively stronger fiscal and liquidity positions. Similarly, Moody's did not change the ratings of the municipalities that were previously positioned at Baa1.za and Baa2.za, reflecting greater tolerance of lower ratings to sovereign credit deterioration.

The five metropolitan cities rated by Moody's in the country -- which include Cape Town, Ekurhuleni, Johannesburg, Nelson Mandela Bay (Port Elizabeth) and Tshwane (Pretoria) -- display comparatively rich economic bases, sound financials and good governance practices. Still, their budgetary structure and relative size mean that economic conditions in these cities are strongly correlated to the country's macroeconomic performance and socio-economic conditions. Moody's says that because growth prospects in the near term will likely be weaker than previously anticipated, the pace of fiscal recovery from the cash flow strains experienced in 2009 and 2010 will be slower. In addition, Moody's expects these large cities -- which together account for well over 25% of the country's population -- to continue to face high demand for welfare benefits and economic infrastructure. Furthermore, these entities also have moderate to high debt levels, which reduces their fiscal flexibility.

Similar to metropolitan cities, medium-sized municipalities are also likely to experience softer economic growth. Issuers in this group -- which include Breede Valley, KwaDukuza, George, Matlosana, Mbombela, Sol Plaatje, and Swartland -- derive a large proportion of operating revenues from their local economies, which are usually narrow or small and will likely not withstand any deterioration in the operating environment. Breede Valley and George also have very high debt levels relative to their budgetary structure, although debt ratios are projected to moderate in the medium term.

The one-notch downgrade of East Rand Water Care Company (ERWAT) reflects the weakening creditworthiness of its parent municipality, the City of Ekurhuleni. The A2.za rating also captures ERWAT's ongoing liquidity pressure and the anticipated increase in debt levels.

Moody's decision to affirm SANRAL's ratings, notwithstanding the sovereign downgrade, reflects eased concerns over the company's financial prospects following the recent Constitutional Court decision to lift the embargo on e-tolling operations on the country's largest toll road project, the Gauteng Freeway Improvement Project (GFIP).

WHAT COULD CHANGE THE RATINGS UP/DOWN

The negative outlooks on all South African sub-sovereigns mirror the negative outlook on South Africa's sovereign rating and reflect systemic pressure.

The sub-sovereign ratings included in today's action are likely to follow the trajectory of South Africa's government rating. A further downgrade of the sovereign rating will likely lead to downward adjustments of sub-sovereign ratings. Additionally, intrinsic financial difficulties resulting in cash flow tensions and consistently high or growing debt levels may lead to downward rating actions independently from any sovereign rating movements.

A stabilisation of the outlooks or an upgrade of South Africa sub-sovereign ratings will likely require a stabilisation or upgrade of the sovereign rating.

RATINGS AFFECTED (South African national scale)

- City of Cape Town: long-term issuer and debt ratings downgraded to Aa3.za, with negative outlook, from Aa2.za; short-term issuer rating of P-1.za affirmed.

- Metropolitan Municipality of Ekurhuleni: long-term issuer and debt ratings downgraded to Aa3.za, with negative outlook, from Aa2.za; short-term issuer rating of P-1.za affirmed.

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

- City of Tshwane: long-term issuer rating downgraded to A1.za, with negative outlook, from Aa3.za; short-term issuer rating of P-1.za affirmed.

- Metropolitan Municipality of Nelson Mandela Bay: long-term issuer rating downgraded to A1.za, with negative outlook, from Aa3.za;

- East Rand Water Care Company (ERWAT): issuer rating downgraded to A2.za, with negative outlook, from A1.za;

- Municipality of Mbombela: issuer rating downgraded to A3.za, with negative outlook, from A2.za;

- Municipality of Breede Valley: issuer rating downgraded to Baa1.za, with negative outlook, from A3.za;

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

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

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

- Municipality of Sol Plaatje: issuer rating downgraded to Baa1.za, with negative outlook, from A3.za;

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

- Municipality of Rustenburg: issuer rating of A2.za, outlook changed to negative from stable;

- Municipality of Amathole: issuer rating of A3.za, outlook changed to negative from stable;

- Municipality of Lephalale: issuer rating of Baa1.za, outlook changed to negative from stable;

- Municipality of Greater Tzaneen: issuer rating of Baa2.za, outlook changed to negative from stable;

- Municipality of Knysna: issuer rating of Baa2.za, outlook changed to negative from stable;

- Municipality of Maluti-a-Phofung: issuer rating of Baa2.za, outlook changed to negative from stable;

- Municipality of uMngeni: issuer rating of Baa2.za, outlook changed to negative from stable;

- South African National Road Agency (SANRAL): issuer ratings of Baa2/P-3 (global scale, local and foreign currency) and A2.za/P-2.za (South African national scale) affirmed, with negative outlook.

The principal methodologies used in rating South African municipalities were Regional and Local Governments Outside the US published in May 2008, The Application of Joint Default Analysis to Regional and Local Governments published in December 2008, and Mapping Moody's National Scale Ratings to Global Scale Ratings published in March 2011. The principal methodologies used in rating SANRAL and ERWAT were Government-Related Issuers: Methodology Update published in July 2010, and Mapping Moody's National Scale Ratings to Global Scale Ratings published in March 2011. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Moody's National Scale 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 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 ratings, please refer to Moody's Rating Methodology published in March 2011 entitled "Mapping Moody's National Scale Ratings to Global Scale Ratings."

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant 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 relevant 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 relevant 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.

Information sources used to prepare each of the ratings are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's considers the quality of information available on the rated entities, obligations or credits satisfactory for the purposes of issuing these ratings.

Moody's adopts all necessary measures so that the information it uses in assigning the ratings 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.

Please see the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

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

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

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. Please see the ratings disclosure page on our website www.moodys.com for further information.

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.

Kenneth Morare
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 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 takes action on South African sub-sovereign ratings following sovereign action
No Related Data.
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