CAPE TOWN - State-owned power utility Eskom received a lower credit rating of ‘CCC+’ by S&P Global Ratings.
In a media statement, S&P stated that the downgrade was due to liquidity concerns and insufficient government support.
“Eskom remains at risk of facing a distressed exchange situation or default in the next six months despite securing R30 billion in short-term funding from local and international funders so far this year.
“We now believe there is a lower likelihood that Eskom would receive extraordinary support from the government, reflecting our view that government support for the utility over the past few months has been insufficient given that the utility’s liquidity concerns persist,” the group said in a statement.
S&P said that even though Eskom may have a near-term improvement in cash balances, They still have a monthly debt service of R2 billion-R6 billion over the next six months.
S&P added that investors won't be impressed with the 5.2% sub-inflation tariff increase awarded by the regulator (NERSA) in the fiscal year 2019 against a budgeted, 10.5% increase as it will worsen the negative cash flow generation.
“We, therefore, anticipate pronounced pressure on Eskom’s fiscal 2019 financing plans, which include capital expenditures (capex) of around R55 billion and negative free cash flow, as well as refinancing R20 billion in bridge financing due August 31, 2018, and about R20 billion in scheduled debt maturities.
“Consequently, Eskom remains at risk of facing a distressed exchange situation or default in the next six months,” S&P said.
S&P said that while the government has taken measures to help Eskom, “we think that government support to the utility over the past few months has been insufficient”.
“Despite recent events indicating that the government would adopt a more constructive attitude toward supporting its state-owned enterprises, including statements by the President in his State of the Nation address, the support framework set forth in the budget speech on February 21, 2018, fell short of our expectations.
“In our view, the budget does not adequately address the amount and timing of financial support given Eskom’s imminent forthcoming liquidity requirements, and focused instead on previously announced planned strategic asset sale initiatives, extensions to the guarantee framework, and changes to the management structure.”
“Despite recent events indicating that the government would adopt a more constructive attitude towards supporting its state-owned enterprises, including statements by the president in his State of the Nation Address, the support framework set forth in the budget speech on February 21, 2018, fell short of our expectations.”
“We would consider revising the outlook to stable if pressure on Eskom’s liquidity eased sustainably, and the government provides additional funding to offset the company’s large negative free cash flow,” S&P said.