Eskom gets a big boost

Ratings agency Moody’s has upgraded power utility Eskom’s credit rating by two notches from Caa1 to B2.

B2 puts Eskom in the group’s “highly speculative” grouping, which is five levels below “investment grade”, or five levels into ‘junk’ status.

While this is still a poor reflection of the group, it is far better than the Caa1 rating, which shows an entity at severe risk of defaulting on its payments. As such, Eskom’s default risk rating has also abated with the overall upgrade.

The group says the outlook for Eskom is currently stable.

According to Moody’s the main drive behind the updatade is the signing of the Eskom Debt Relief Act on 5 July 2023 and receipt of the first payment from South Africa’s National Treasury in August 2023.

The Eskom Debt Relief Act will see the National Treasury provide R254 billion to Eskom over the period to March 202 to fund R168 billion of debt maturities and R86 billion of interest payments.

The Act requires the National Treasury to advance R78 billion in the 2023-24 financial year, R66 billion in 2024-25 and R40 billion in 2025-26 to Eskom.

“The funds will be structured as a loan in the first instance, but will convert quarterly into common equity if the company meets conditions during the debt relief period that include limiting capex to transmission and distribution, with no investment in generation beyond maintenance and certain environmental investments, undertaking no new borrowing, and using the debt relief only to settle debt and interest payments.

“Moody’s regards these conditions as largely within Eskom’s control,” it said.

In addition, R70 billion of Eskom’s debt will be taken over by the National Revenue Fund in 2025-26. The instruments to be transferred have not been specified.

“The injection and debt transfer will significantly reduce risks to Eskom’s liquidity over the next three years, and in combination with the prohibition on most new borrowing, will cause Eskom’s debt to fall from around R450 billion as of March 2023 to around R300 billion by March 2026.

“Moody’s estimates that the majority of the debt reduction will come from unguaranteed debts, with the share of Eskom’s debt benefiting from a government guarantee rising from 74% in March 2022 to almost 80% in March 2026.”

Big risks ahead

While this is a big positive turn for Eskom’s debt, Moody’s highlighted that the risks are still vast.

Most notably, the group remains constrained by persistently poor operational performance and tariffs that do not adequately finance the company’s operating and capital expenditure.

Load shedding has remained persistent, with the country returning to stage 6 load shedding from 4 September following the failure of several units.

In addition, debt arrears from municipal electricity companies have grown to R63.2 billion as of August 2023, and more than half of the country’s municipalities have defaulted on their bills.

“We expect that Eskom will need to raise debt after the end of the debt relief period, particularly to finance investments in networks and to refinance maturing debts. Without the benefit of a new guarantee scheme, its ability to do so on commercially acceptable terms will rely on significant improvements in its operations, debt collection, governance, and regulatory arrangements.

“Absent such improvements or alternative mechanisms to ensure access to capital, the rating is likely to come under pressure as April 2026 approaches,” the group said.

Eskom’s rating also remains lower due to environmental concerns, with the company also facing high carbon transition risk, given its high exposure to coal generation and limited capacity to address this.

Even so, the debt relief measures have significantly reduced Eskom’s default risk, Moody’s said, and the government continues to have a strong incentive to take further measures in advance of a default because of sizeable backed debts.

“However, continued deterioration of Eskom’s generation and network assets, and the growth of independent power producers, mean recoveries are likely to be a lower than typical infrastructure issuers if a default were to occur.”

The stable outlook reflects Moody’s expectation that the debt relief will provide Eskom with time and financial flexibility to improve operational performance.

The stable outlook also reflects the stable outlook on the Government of South Africa, it said.

Future upgrades?

Moody’s said that Eskom’s ratings could be upgraded if the company achieves significant improvements in operational performance, debt collection and governance such that it can finance required investments on a sustainable basis.

The ratings could also be upgraded if the Government of South Africa were upgraded.

However, there are also risks to the downside.

The rating could be downgraded if Eskom’s operational performance or investment needs during the debt relief period prevent the company from reducing leverage as required by the Debt Relief Act, or if the company fails to comply with other conditions for conversion of the shareholder loans to equity.

A downgrade could also be on the cards if there is significant doubt about the company’s ability to raise capital as required after the end of the debt relief period, the group said.

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