Moody's downgrades embattled Eskom

Johannesburg - Moody’s downgraded Eskom on Wednesday, citing the state utility's liquidity woes and poor governance as the main reasons for the decision.

The ratings agency announced a downgrade on Eskom's long-term corporate family rating (CFR) to Ba3 from Ba2 and placed the state utility on review for a further downgrade.

The rating actions follow the announcement on November 24 that Moody’s has placed the South African sovereign’s rating on review for downgrade.

Commenting on the downgrade, Moody's said Wednesday's rating action on Eskom reflected its view that the stand-alone credit strength of the company has weakened as a result of its deteriorating liquidity position and poor corporate governance, in the context of a more volatile funding environment.

Fin24 earlier reported that the power utility’s poor governance had left it teetering on the edge of insolvency, with only R1.2bn of liquidity reserves expected to be in hand at the end of the month.

This was based on Eskom’s latest report to its shareholder representative, Public Enterprises Minister Lynne Brown, which showed its liquidity was fast drying up, as it struggled to raise funds in an unsympathetic market.

The ratings agency added that the likelihood of timely government support may have been reduced. 

Moody's said the ratings reflect the potential deterioration of the South African government's credit profile, in particular in the country's institutional, economic and fiscal strength, "as captured by Moody's recent decision to place South Africa's Baa3 government bond ratings on review for downgrade". 

As of November, the company achieved over half of its revised annual targeted funding for March 2017 to March 2018, but still needs to raise a further R24bn, Moody's added.

"In addition, it will continue to have high ongoing financing needs over the period of its five year plan unless it can materially scale back capex, which is unlikely."

It said access to the capital market and other funding sources has been restricted by investor and lender concerns on Eskom's poor corporate governance and ties to the Gupta family against a background of a potentially weaker sovereign.

"Eskom's business and financial profile continues to be challenged by a very difficult operating environment. The company is generating lower revenues than anticipated, reflecting subdued demand at a time when the company still has a large capex plan, including the completion of Medupi and Kusile power plants."

Eskom's ratings are under review in line with that of the sovereign, Moody's said, adding that the current sovereign review may not be resolved until after the state budget in February.

The power utility's ratings could be confirmed if South Africa's Baa3 ratings are confirmed, if Moody's assessment of strong government support for Eskom remains unchanged, and if its corporate governance issues, operational and liquidity profile were to demonstrably improve.

But another downgrade looms should South Africa be downgraded further, and the assessment showed Eskom's liquidity and operating profile fail to shows signs of stabilisation. 

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