Standard & Poor’s (S&P) has lowered its long-term local and foreign currency ratings for Eskom to ‘BB+’ from ‘BBB-‘.
The ratings agency added that the outlook is negative.
It also lowered the long- and short-term South Africa national scale ratings to ‘zaA/zaA-2’ from ‘zaAA-/zaA-1’.
“The downgrade reflects our reassessment of Eskom’s management and governance to ‘weak’ from ‘fair’,” said S&P.
It revised down its assessment of Eskom’s stand-alone credit profile (SACP) to ‘ccc+’ from ‘b-‘ – this led to the lowering of the long-term rating to ‘BB+’.
“Our view of Eskom’s ‘weak’ business risk profile factors in our assessment of a ‘weak’ regulatory advantage under the framework supervised by the national energy regulator of South Africa,” the agency said.
“The business risk profile also reflects our opinion of important execution and operational risks associated with Eskom’s very large capital expenditures program, which has been subject to successive delays at a time when South Africa’s reserve margin remains stretched.”
S&P added that its revised view of Eskom’s management and governance is partly based on the recent announcement of its board regarding the suspension of the company’s CEO and three senior executives, pending an inquiry.
This has led the agency to question the corporate governance arrangements at the company.
“We think the suspension of such senior members of the executive introduces a gap in the leadership at the company at an important time, given that the entity still has material operational and liquidity management issues to overcome,” it said.
“Eskom has a track record of high turnover at the senior executive level, with a number of changes in CEOs and CFOs in recent years. The suspension also leads us to question the timing of the delivery of new power plants and the cost of project completion.”
However, S&P stated that it could reassess its view of Eskom’s management and governance if the company implements practices to counteract management’s shortcomings.
“We consider Eskom to be a government-related entity (GRE). Under our criteria for GREs, we believe there is an ‘extremely high’ likelihood that the Republic of South Africa would provide timely and sufficient extraordinary support to Eskom in the event of financial distress,” the agency explained.
“Our assessment of an ‘extremely high’ likelihood of government support leads us to apply six notches of uplift to the SACP, resulting in our ‘BB+’ long-term rating on Eskom.”