MOODY’S Investors Service (“Moody’s”) has downgraded the senior unsecured ratings of Eskom Holdings SOC Limited , South Africa’s largest electricity producer to Ba1 from Baa3.
The outlook on the ratings is stable. Today’s rating action was prompted by the weakening of the South African government’s credit profile, as reflected in Moody’s downgrade of South Africa’s government bond rating on 6 November 2014 to Baa2 (stable) from Baa1 (negative).
The Vice President-Senior Analyst Infrastructure Finance Group at Moody’s Investors Service Ltd, Paul Marty explained: “Eskom’s senior unsecured bond rating is primarily driven by Moody’s assumption of a high level of potential government support in case of financial distress.
Given Eskom’s strong linkage with the South African government and its high sensitivity to changes in the sovereign credit profile, the one-notch downgrade of its senior unsecured ratings to Ba1 (stable) reflects the one-notch downgrade of South Africa’s ratings to Baa2 (stable) on 6 November 2014.”
Accordingly, the two-notch differential between the company’s and the government’s ratings remains unchanged. Moody’s assumption of a high level of government support in the event of financial distress is underpinned by Eskom’s strategic importance to the government’s social and economic policy as the country’s dominant electricity supplier.
He said Moody’s expectation of government support being provided in the event of need is evidenced by the direct financial support provided in the past, such as the guarantee framework agreement of ZAR350 billion and a ZAR60 billion subordinated loan, as well as the recent announcement by the government that it had approved a package of solutions to address Eskom’s funding gap.
The main financial components thereof are an equity injection of at least ZAR20 billion to be funded through the sale of non-strategic state assets and the potential conversion of the ZAR60 billion subordinated loan to equity. Moody’s has also revised downwards its assessment of the standalone credit quality of Eskom (expressed as a baseline credit assessment, or BCA) to b3 from b1.
This reflects the company’s very weak financial profile resulting from lower tariff increases than requested over the regulatory period from April 2013 to March 2018, rising operating costs and the continued rollout of a large capital programme. Whilst the measures proposed by the government, including the equity injection, would provide much needed liquidity and ease short-term funding pressure, their effect on the company’s credit metrics would be marginal.
This underscores the need for tariff increases to ensure the sustainability of Eskom’s financial profile. In that respect, the recent announcement by the National Energy Regulator of South Africa (NERSA) that average electricity tariffs will increase by close to 13% in 2015/16 instead of the planned 8% to allow for a recovery of past shortfalls should, in combination with potential savings under the company’s business productivity program, support a mild recovery in financial ratios in the medium term.
The US-based largest credit rating firm also noted the government’s statement that it will support Eskom’s application to NERSA for tariff adjustments. However, in Moody’s opinion fully cost-reflective tariffs have yet to be implemented.
African Eye News.com
