Rating upgrade to help Eskom sell debt

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FitchRatings Reuters. A plaque is pictured at the entrance of the Fitch offices.

A notch upgrade to the highest rating assigned by Fitch Ratings on its national rating scale could not have come at a better time to retain investors’ confidence in Eskom.

The global ratings agency upgraded the utility’s national long-term rating on Wednesday to AAA(zaf) with a stable outlook from AA+(zaf) and affirmed its national short-term rating at F1+(zaf).

The change in credit ratings moved Eskom, which is trying to get a stand-alone rating, ahead of that of the sovereign as the country’s long-term foreign and local currency issuer default ratings were affirmed at BBB and BBB+, respectively, last month.

Eskom’s ratings were upgraded even though the utility’s credit ratings were aligned with the sovereign’s due to its financial backing by the government in the form of guarantees for a large part of its debt.

“This is very helpful because it enhances the ability of international and local pension funds to buy Eskom’s debt,” Azar Jammine, the chief economist at Econometrix, said, adding that this would help Eskom raise funding for its expansion plans.

While the upgrade of Eskom’s credit ratings surprised some, given the operational challenges that the company has faced since last year, Jammine pointed out that the rating agencies did not care much about the operational side of the business.

“It’s the financial health and how sustainable it is that matters. What Fitch is signalling is that Eskom is more financially sound now than it was before,” Jammine said.

He said the utility’s financial performance announced last month and the fact that it had raised tariffs and had government guarantees formed the basis for the credit rating upgrade.

Eskom posted R12.24 billion profit in the six months to September last year. Its revenue for the period increased to R77.8bn as electricity tariffs rose.

After a challenging start to the year, Eskom has also pinned its hopes on the rating upgrade to reinstate investor confidence.

“The positive rating action is very helpful at this critical time as Eskom continues to execute the current build programme,” Brian Dames, the chief executive of Eskom, said yesterday. “A positive rating adjustment will assist Eskom in accessing funding in capital markets and it will improve investor confidence.”

But electricity analyst Chris Yelland of EE Publishers was “a little surprised” by the upgrade as he had not seen “anything change for the better at Eskom”, he said.

“But it might be because Eskom has not fully utilised all the guarantees it got from the government because it has not had any need to take them up. So that might give comfort to the rating agencies,” he said.

In 2011 the government increased its guarantees awarded to Eskom to R350bn and the utility said only R138bn of that had been utilised.

Jammine said the fact that a large amount of Eskom’s liability was transferred to the government gave Eskom better chances to raise funding on the capital markets.


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