Eskom placed on review for downgrade

Moody’s has placed the Ba1 senior unsecured and the (P)Ba1 senior unsecured MTN ratings of Eskom on review for downgrade.

It said that the rating action was driven by the weakening of the South African government’s credit profile, as captured by Moody’s review for downgrade of South Africa’s Baa2 bond and issuer ratings initiated on 8 March 2016.

“Eskom’s senior unsecured bond ratings are primarily driven by Moody’s estimate of a high level of potential government support in case of financial distress,” the ratings firm said, highlighting the state power utility’s strong linkage with the South African government and its high sensitivity to changes in the sovereign credit profile.

“Moody’s estimate 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,” it said.

Eskom generates 95% of the country’s electricity.

Moody’s said its expectation of government support being provided in the event of need is evidenced by direct financial support in the form of:

  • a R350 billion Guarantee Framework Agreement,
  • a R60 billion shareholder loan which was converted into equity in 2015, and
  • a planned R23 billion equity injection, of which R18 billion have already been provided.

In its review, Moody’s said it will consider the evolution of Eskom’s standalone credit profile as well as the willingness and ability of the government of South Africa to continue to provide support to Eskom given its deteriorating credit profile.

It said it will factor in the outcome of the sovereign rating review.

“Moody’s will endeavour to conclude the rating review within 90 days,” the ratings agency said.

It said that Eskom’s ratings could be confirmed if:

  • South Africa’s Baa2 ratings are confirmed;
  • Moody’s assessment of high government support for the company remains unchanged; and
  • the company’s operational and liquidity profile were to continue to stabilize.

Conversely, Eskom’s ratings could be downgraded if:

  • Moody’s were to downgrade the government’s ratings;
  • Moody’s assessment of high government support for the company were to change; or
  • Eskom’s operational and liquidity profile failed to stabilize.

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Eskom placed on review for downgrade