Moody’s stays downbeat on Eskom’s prospects, says upgrade in near future ‘unlikely’

  • Sovereign credit ratings agency Moody’s kept its rating of Eskom at Caa1 with a negative outlook.
  • Moody’s upgraded South Africa’s outlook last week, and on Wednesday upgraded the outlooks of major banks and insurers.
  • The agency said equity injections from the government alone were not enough to transform Eskom’s financial profile.

While credit rating agency Moody’s last week upgraded its outlook on South Africa from “negative” (which meant the next step could potentially be another downgrade) to “stable” – it kept a negative outlook on Eskom.

On Wednesday, Moody’s maintained its rating of Eskom at Caa1 with a negative outlook, and warned that the power utility must urgently get to grips with its debt burden and operational problems if it hoped for an upgrade.

While government’s commitment to support Eskom’s financial recovery was positive, Moody’s is concerned about the R36 billion that Eskom is owed by struggling municipalities, load shedding, and long-term uncertainty on electricity tariffs.

Moody’s said an upgrade of Eskom’s ratings was unlikely in the short term, given the negative outlook.

Moody’s noted that Eskom had received government support in the form of R137 billion in equity injections over the last three years, as well as the government’s commitment to continue supporting the government with a further R88 billion over the next four years.

However, Moody’s said it would take more than money to transform the entity’s financial profile.

“These government equity injections have been significant in absolute and relative terms and the primary driver behind a reduction in Eskom’s debt. However, they have not been able – on their own – to substantially and sustainably transform Eskom’s financial profile in the context of its high debt burden and continued challenges to its operating performance.”

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However, Moody’s said Eskom’s outlook could be changed to “stable” if the company can provide greater certainty that it won’t default on debt,

“Eskom’s ratings could be upgraded if it becomes clear that any debt solution is accompanied by the implementation of a viable strategy for the business.”

But it warned that Eskom’s ratings could be downgraded if there were concerns about the company’s ability to meet its debt repayments, or if any debt reorganisation would likely lead to creditor losses that are higher than those implied in the current ratings.

Moody’s noted that a “debt solution” for Eskom remained a possibility, and the outcome of ongoing work could be announced within this financial year.

“However, at this stage, it is unclear what, if any, form of debt relief will be implemented,” the rating said.

Last week, Moody’s kept its rating of South Africa at Ba2 (two rungs below investment grade), and upgrade its negative outlook to “stable” – thanks in part to the impact of high commodity prices, and government’s ability to keep the public sector wage bill in check. On Wednesday, it also upgraded the outlook of the biggest banks and insurers in South Africa, while affirming their ratings.

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