Eskom outlook positive for the first time in 15 years

Bloomberg1 November 2022

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Moody’s Investors Service raised its outlook on Eskom’s debt ratings to positive for the first time since 2007 after South African Finance Minister Enoch Godongwana said that the government could take over a substantial portion of the power company’s debt.

Moody’s boosted the outlook from negative, signalling that the next rating action may now be an upgrade instead of another downgrade.

It affirmed the utility’s long-term corporate family rating at Caa1, seven levels below investment grade. Eskom’s rating has been on a downward trend since 2008, and the outlook change marks a potential for a change in that course, Joanna Fic, senior vice president at Moody’s, said by email.

The government expects to shift between one-third and two-thirds of Eskom’s about R400 billion of debt onto its own balance sheet, Godongwana said in the mid-term budget last week. The loss-making state utility that’s been surviving on government guarantees is the biggest known risk to the economy and public finances, the Treasury said.

“The positive outlook recognizes the commitment to address Eskom’s unsustainable capital structure,” Moody’s said in an emailed 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 will 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 gross domestic product will peak two years earlier and at a lower level than expected.

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-serving obligations or if it appeared likely that any reorganization will lead to creditor losses higher than those implied in the current ratings, according to Moody’s.

The yield on Eskom bonds due in 2028 was 5.2 basis points higher at 8.67% by 17h78 in Johannesburg.