S&P downgrades Eskom over financial risks

Cape Town - S&P Global Ratings announced on Friday that it lowered Eskom’s long-term corporate credit rating to 'BB' from 'BB+', while the outlook remains negative.

"The negative outlook reflects that on the sovereign rating, as well as the potential uncertainty regarding the government's clear commitment, as well as its ability, to provide timely support to compensate for any shortfall in funding Eskom experiences during the fiscal year April 1, 2017-March 31, 2018."

The rating agency cited the increased financial pressure faced by Eskom due to the uncertain tariff path resulting from the ongoing court case against the National Energy Regulator (NERSA). The matter, which is still in arbitration, could lead to Eskom receiving considerably less tariff increases in fiscal year 2017.

"A negative outcome would increase pressure on Eskom's liquidity position, which we already view as less than adequate."

S&P also expressed concern over uncertainty around the government’s decision to extend the current R350bn Government Framework Agreement (GFA) availability period extension.  As it currently stands, the GFA will expire on 31 March 2017.

"Although we still believe that Eskom will benefit from considerable government support, the predictability of such full and timely government support in all circumstances is decreasing in our view."

Eskom said in statement that it is confident the current process to extend the GFA availability period will be achieved to address the rating agency’s concern.

"It is clear from this ratings announcement that regulatory and tariff certainty is critical for Eskom’s financial sustainability; therefore the conclusion of the ongoing court case against NERSA is imperative for the determination of an appropriate tariff regime," said chief financial officer Anoj Singh.

He noted that the 1- notch ratings downgrade will not have a material impact on Eskom’s funding plans for the financial year ending March 2017.

"Eskom has secured funding of 86% for this period and this we believe will mitigate possible liquidity risks.”

Earlier on Friday Fitch Ratings announced that it dropped South Africa's outlook to negative, while affirming the country’s rating at BBB-, which is one notch above junk status.