Credit rating specialist Fitch Ratings has upgraded state-owned defence equipment manufacturer Denel’s long-term rating to ‘AAA(zaf)’ from ‘AA(zaf)’ and affirmed its national short-term rating at ‘F1+(zaf)’ and its outlook as ‘stable.
According to Fitch, “The upgrade reflects a recalibration of the higher end of the South African National Rating scale and the alignment of Denel’s ratings with those of the South African sovereign (BBB/BBB+/Stable), reflecting expectation of timely support from the government to service and repay Denel’s debts.”
Under Fitch’s parent and subsidiary rating linkage methodology, the agency deemed Denel’s legal, operational and strategic links with the state of South Africa as strong, including, in particular, the state’s irrevocable and unconditional guarantee of a significant portion of Denel’s debt.
Fikile Mhlontlo, Denel’s group financial director, believes the significance to Denel’s operations include significantly better access to credit facilities required to execute significant new contracts and lower borrowing costs. Denel’s national short-term rating was confirmed at ‘F1+ (zaf)’ and its outlook is described as ‘stable.’
He points out that the ratings upgrade comes on the back of all time high order cover in excess of R20 billion, improving financial performance, a strengthened balance sheet and continued strong support from stakeholders including Government. He also recognises the success of the financial turnaround which led to Denel reporting profits over the past three years.
Commenting on the news, Denel group chief executive, Riaz Saloojee, said: “It is a vote of confidence in our prudent financial practices and a clear indication that our turnaround strategy is working and being recognised in financial circles and investor communities.
“Denel is a valuable national asset which contributes more to South Africa than what is contained in its primary mandate to supply the defence community with defence-related technology and solutions. We are growing into our role as a technology and advanced manufacturing powerhouse which also contributes to the broader national objectives of skills development and job creation through its investments in research and development and technical education.”
Denel has managed to diversify its revenue base away from the South African defence sector with 50% of revenue now generated from exports, most notably to the Middle East and Southeast Asia. Fitch Ratings expects the export business to remain an important aspect of Denel’s revenue growth but cautioned that competitive pressure is likely to come from large global contractors.