Moody’s lifts Eskom’s rating outlook to positive

Moody’s Investors Service boosted Eskom’s rating outlook from negative this week, signalling that the next ratings action may be an upgrade instead of another downgrade.

Eskom’s rating has been on a downward trend since 2008, so the outlook change marks a potential shift from that course, said Joanna Fic, senior vice-president at Moody’s.

The government expects to move between one-third and two-thirds of Eskom’s about R400bn of debt onto its own balance sheet, finance minister Enoch Godongwana said in the medium-term budget last week.

The power utility is the biggest known risk to the economy and public finances, the Treasury said.

“The positive outlook recognises the commitment to address Eskom’s unsustainable capital structure,” Moody’s said in a statement on Monday.

“A partial debt transfer to the government will improve the company’s balance sheet and reduce pressure on cash flows through lower interest payments.”

While Godongwana said there would be strict conditions attached to the debt transfer, he provided few details.

The swap is also not accounted for in updated fiscal metrics published last week, which show the government’s ratio of debt to GDP will peak two years earlier and at a lower-than-expected level.

A partial transfer will be complex, requiring careful management given the diverse creditor base, Moody’s said.

Also, the relief won’t itself solve Eskom’s problems that include poor operational performance, a lack of cost-reflective tariffs and overdue liabilities from municipalities, it said.

Eskom’s ratings could still be downgraded if there are concerns about the company’s ability to meet its debt servicing obligations, or if it appeared likely that any reorganisation will lead to creditor losses higher than those implied in the current ratings, according to Moody’s.

Public enterprises minister Pravin Gordhan, under whose department Eskom falls, on Tuesday welcomed Moody’s decision to raise the utility’s debt ratings to positive for the first time since 2007.

“The announcement by the minister of finance that government will take on Eskom debt is a positive signal that will take Eskom forward,” Gordhan said.

However, he said it would take time for Eskom to use the money that it was saving on debt to revive ailing power stations.

“It means the financial position of Eskom is better but means nothing about generational or operational capacity, nor does it change the probability of Eskom being able to keep the power on in the short term,” economist Iraj Abedian said Tuesday.

Bloomberg, with Hajra Omarjee