TEXT-Fitch affirms Rand Water at 'AA+(zaf)', outlook is stable

Fri Dec 7, 2012 10:54am EST

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Dec 7 - Fitch Ratings has affirmed Rand Water's National Long-term rating at
'AA+(zaf)' and assigned national senior unsecured rating at 'AA+(zaf)'. The
agency also affirmed the South African state-owned bulk water utility's National
Short-term rating at 'F1+(zaf)'. The Outlook for the Long-term rating remains
Stable.

The affirmation reflects Fitch's assessment of the strength of the linkage
between the company and the state, reflecting the critical and strategic nature
of South Africa's water sector, and a high level of implied support from the
national government. South Africa's Long-term foreign currency Issuer Default
Rating (IDR) is 'BBB+' and its Long-term local currency IDR is 'A', both with a
Negative Outlook.

KEY DRIVERS:
- Strong Shareholder Links - The strong links between Rand Water and the
government are evidenced by the full ownership by the South African state,
supportive regulated tariff structure, customer structure largely consisting of
public entities, periodic approval of investment programme and external funding
framework, direct grants to certain infrastructure projects and zero dividend
policy. Fitch assumes that further tangible support would be provided, if
needed.

- Natural Monopoly Position - The credit profile of Rand Water is supported by
the regional monopoly position in the greater Gauteng region. Local
municipalities and local authorities owned by the state make up almost 90% of
Rand Water's water sales, with its largest customer being the City of
Johannesburg (Long-term local currency rating: 'BBB+/Stable').

- Supportive Tariffs Structure - The tariff structure and annual tariff
approvals take into consideration all costs drivers, capital expenditure, as
well as the local socio-economic realities of the service area. With that, Rand
Water is able to recover most of its operational costs within the current
tariffs. Fitch therefore expects Rand Water to maintain a relatively stable (if
comparatively low) operating margin.

- Large Capex Funded Externally - Rand water is launching a R9.5bn capital
expenditure plan over the next five years aiming to increase capacity and
replace its ageing infrastructure. With rapid increase in water demand from a
growing population in the urban areas, Fitch views the capex ramp up as an
understandable, but not risk-free step. The company anticipates that it will
fund most of the capex externally, which should be possible given its
preferential access to the domestic capital market. However, funds from
operations (FFO) adjusted net leverage is to increase to over 5x by 2016 from
close to zero in 2012.

- Capex Delays Possible - It is possible that the complexity of delivering an
investment programme of such scale will lead to delays and consequently slower
ramp up of leverage. The weaker credit metrics are still expected to be
commensurate with peers in this capital intensive industry.

- Weakening financial metrics - Rand Water remains South Africa's largest bulk
water utility supplying water to approximately 12m people in municipalities and
a number of mines and industrial businesses through its 3500km network of
pipelines. Its profile is in some aspects comparable to water utilities in
developed markets.

LIQUIDITY & DEBT STRUCTURE

Strong liquidity: Liquidity is supported by cash balance of R747m and committed
facility of R1bn as of 31 October 2012. There are no major debt maturities in
the medium term, after the company redeemed the RW02 bond of R208m in July 2012.
Although Fitch anticipates negative free cash flow due to the capex, the
spending will be contingent on obtaining available funding.

RATING SENSITIVITY GUIDANCE:

Positive: Future developments that could lead to positive rating actions
include:
- Explicit guarantee: A one-notch upgrade to a 'AAA(zaf)' National Long-Term
Rating remains unlikely given the absence of an explicit guarantee from the
state.
Negative: Future developments that could lead to negative rating actions
include:
- Level of state support: Indications of a lack of financial support by the
government could lead to a revaluation of the strength of the linkage between
Rand Water and the state, possibly with an adverse impact on credit ratings.

Additional information is available on www.fitchratings.com. For regulatory
purposes in various jurisdictions, the supervisory analyst named above is deemed
to be the primary analyst for this issuer; the principal analyst is deemed to be
the secondary.

The ratings above were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been compensated for the provision of the ratings.

Applicable criteria, 'Corporate Rating Methodology', dated 8 August 2012, is
available at www.fitchratings.com.

Applicable Criteria and Related Research:
Corporate Rating Methodology
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