CAPE TOWN – Eskom noted with “disappointment” Moody’s Investors Service’s decision to downgrade the power utility to B3 from B2, the long-term corporate family rating (CFR) of Eskom Holdings, and the zero coupon euro bonds to B3 from B2.
Moody’s said yesterday that an “ambitious” timeline for Eskom’s reorganisation, its weak liquidity, sizeable debt obligations and the tight government fiscal position had constrained Eskom’s debt ratings.
Concurrently, Moody’s downgraded to (P)Caa1/Caa1 from (P)B3/B3 the global medium-term note (GMTN) programme and the senior unsecured GMTNs of Eskom. The outlook remained negative.
Additionally, Moody’s affirmed the Baa3 rating on Eskom’s notes, which benefit from the unconditional guarantee of the government.
The rating action brings Eskom’s ratings in line with the change in outlook on the Baa3 long-term rating of the government to negative, from stable, on Friday.
“The rating downgrade takes account of the persistent risks to Eskom’s capital structure and liquidity, notwithstanding government support in the form of equity injections as indicated for the 2020/22 financial years, and the promise of consideration of a further support, should that be necessary,” Moody’s said.
Eskom said the current board and management had worked “painstakingly hard” to try to resolve corporate governance issues of the past regime.
It said Eskom also continued to implement the generation recovery 9-point plan to stabilise the plant.
“The company’s liquidity levels remain at low levels. We have, however, seen a considerable amount of support for Eskom paper from the local markets and coupled with the financial support announced by the government, we are cautiously confident that our debt obligations are not at risk,” the group said
Eskom’s acting group chief executive and interim executive chairperson Jabu Mabuza said: “We acknowledge the concerns expressed by Moody’s and continue to work closely with shareholder ministries to resolve the current challenges. Whichever option gets implemented through the unbundling processes, we will ensure that our creditors will not be compromised and that the execution of these options gets done under acceptable legal frameworks.”
The first phase of Eskom’s restructuring included the functional separation of generation, transmission and distribution, to be completed by March 31, while the legal separation of distribution and generation functions was to be finalised by the end of December 2021.
The government was further considering the reorganisation of the generation division, with the formation of clusters, including a yet-to-be-decided number of power plants that will compete with each other and the independent power producers.
“While the desire to increase transparency and accountability is clearly positive in the context of Eskom’s corporate governance issues, the timeline for the reorganisation is ambitious, with likely increased costs of implementation in the medium term and uncertainty around the potential financial and operational benefits to Eskom,” Moody’s said.
Moody’s listed Eskom’s challenges as high indebtedness, weak liquidity, limited revenue growth, poor plant performance, high investment requirements, and environmental and social governance factors that weigh on credit quality, including weak corporate governance, political sensitivity around tariffs and high employment, and an old and inefficient coal-generation fleet.
Moody’s noted the government’s plan to inject some R138 billion in equity over the next three years.
Any additional cash flow support was likely to be in the form of loans, with a potential for a debt relief once Eskom had made enough progress in implementation of the company’s business reorganisation and cutting costs.
An upgrade of Eskom’s ratings was unlikely in the short term, given the negative outlook, Moody’s said.
Bond market investors had benefited from the government’s plan to bail out Eskom, and Eskom’s 2025 bond had made a good return of 19 percent in the year to November 4, which was 6.5 percentage points more than the equivalent South African government bond, Bloomberg’s fixed-income analysts reported.
“Moody’s Investors Services’ decision not to downgrade the government on November 1 may give Eskom debt investors further reason for short-term cheer,” Bloomberg’s analysts noted.
“Eskom’s troubles aren’t going away, but for some investors in Eskom debt this temporary lull is paying off,” they said.