The ratings agency said the downgrade was prompted by the weakening of the South African government’s credit profile, as reflected in Moody’s downgrade of South Africa’s government bond rating.
“Eskom’s senior unsecured bond rating is primarily driven by Moody’s assumption of a high level of potential government support in case of financial distress,” it said.
“Given Eskom’s strong linkage with the South African government and its high sensitivity to changes in the sovereign credit profile, the one-notch downgrade of its senior unsecured ratings to Ba1 reflects the one-notch downgrade of South Africa’s ratings to Baa2 on 6 November 2014.”
Moody’s added that the two-notch differential between the company’s and the government’s ratings remains unchanged.
The agency said its assumption of a high level of government support in the event of financial distress is underpinned by Eskom’s strategic importance to the government’s social and economic policy as the country’s dominant electricity supplier.
“Moody’s expectation of government support being provided in the event of need is evidenced by the direct financial support provided in the past, as well as the recent announcement by the government that it had approved a package of solutions to address Eskom’s funding gap,” it said.
“The main financial components thereof are an equity injection of at least 20 billion rand to be funded through the sale of non-strategic state assets and the potential conversion of a 60 billion rand subordinated loan to equity.”
Moody’s has also revised downwards its assessment of the standalone credit quality of Eskom to b3 from b1.
“This reflects the company’s very weak financial profile resulting from lower tariff increases than requested over the regulatory period from April 2013 to March 2018, rising operating costs and the continued rollout of a large capital programme,” the agency said.
It further stated that whilst the measures proposed by the government, including the equity injection, would provide much needed liquidity and ease short-term funding pressure, their effect on the company’s credit metrics would be marginal.
“The recent announcement by NERSA that average electricity tariffs will increase by close to 13 per cent in 2015/2016 should, in combination with potential savings under the company’s business productivity program, support a mild recovery in financial ratios in the medium term,” Moody’s said.
“Moody’s also notes the government’s statement that it will support Eskom’s application to NERSA for tariff adjustments. However, in Moody’s opinion fully cost-reflective tariffs have yet to be implemented.”
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According to Moody’s, the outlook is stable and reflects the outlook on the government of South Africa’s ratings.
“Eskom’s Ba1 rating continues to reflect an expectation of a high probability of government support, reflecting the company’s critical role as supplier of substantially all electricity used within South Africa,” said the agency.
“[It also reflects] a challenging regulatory framework relative to operating costs in the context of a very stretched electricity system until new generation comes on stream, the risks associated with the execution of a large capital investment programme and the company’s very weak financial profile.”