S&P puts Eskom bonds on the cusp of ‘deep junk’ territory
Eskom’s bonds were placed on the bottom rung of "noninvestment grade" by S&P Global Ratings on Thursday night.
Besides cutting Eskom’s rating to BB- from BB, the ratings agency also gave the power utility a negative outlook — meaning Eskom’s credit rating now stands precariously on the edge of falling into the deep junk territory of the "highly speculative" single B range.
Two key reasons S&P gave for its decision were the likelihood that Eskom would be granted tariff increases of 2.2% in its financial year to end-March 2018, rather than its requested 9.5%, following legal action from industrial customers; and that the government had not yet said whether it would renew its R350bn debt guarantee when it expires in March.
S&P originally cut Eskom to BB from BB+ with negative outlook on November 25. S&P said Friday's rating reflected the negative outlook it subsequently gave SA's sovereign rating.
Moody’s, on the other hand, maintained Eskom at Ba1 (equivalent to BB+) on December 5.
"We continue to assess Eskom’s management and governance as weak, due to factors such as resignations of board members, including the recent resignation of the CEO," S&P said in its statement.
S&P cited the uncertainty over the outcome of the ongoing court case against the National Energy Regulator of SA (Nersa) which is still in arbitration.
"A negative outcome would increase pressure on Eskom's liquidity position, which we already view as less than adequate," S&P said.
The Nersa court case and uncertainty over what will happen when Eskom’s R350bn government guarantee expires in March were raised by all three major credit ratings agencies.
"The government has not yet agreed to extend it to 2023 as Eskom has requested. An untimely extension would further heighten Eskom's liquidity risk," S&P said.
Fitch on Friday said it lowered its outlook on Eskom to negative from stable while affirming its long-term local-currency issuer default rating at BBB-.
Eskom chief financial officer Anoj Singh said in the press release: "Eskom welcomes Fitch’s decision to affirm our credit rating at BBB-. We view Fitch’s and Moody’s rating affirmations as an indication of the positive financial and operational results achieved by the business.
"We are acutely aware of the concerns raised by the rating agency and continue to engage with the relevant stakeholders to expediently resolve these issues."