Moody’s upbeat about Eskom plan

2014-10-23 14:36

The government’s announcement of the package of solutions to support electricity utility Eskom was positive, rating agency Moody’s has said.

“We view the announcement as positive because it clarifies the size of the proposed equity injection, although no information was provided regarding potential tariff increases,” said vice-president and senior analyst Paul Marty.

“As part of the medium-term budget policy statement, the government announced that it would inject at least R20 billion of equity into Eskom to be funded through the sale of nonstrategic state assets, although no timetable was disclosed.”

In addition, the government indicated that, if necessary, it could consider providing additional support to Eskom by converting its existing R60-billion subordinated loan to equity.

“At the same time, the government confirmed that Eskom’s additional borrowings, expected to be about R50 billion over the medium term, will need to be accommodated within the existing guarantee facility,” he said.

This was because no new guarantees would be issued.

“We view this announcement as credit positive because the proposed equity injection would provide much-needed liquidity and ease the short-term funding pressure on Eskom,” Marty said.

Eskom’s current Baa3 rating relied on the support Moody’s expected would be provided by government in a distress scenario.

“Eskom’s funds from operations to debt ratio would be 4.4% pro forma versus 3.6% actual at year-end 2013, assuming an aggregate equity injection of R50 billion.”

This underlined the need for tariff increases to ensure the sustainability of Eskom’s financial profile, for which no additional clarity had been provided.

“The negative outlook on the rating therefore continues to reflect Eskom’s weak standalone credit quality [as expressed by a baseline credit assessment of b1],” he said.

It reflected the risk that the measures to be taken would fail to address Eskom’s problems, and the negative outlook for the South African government’s rating.

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